Earnings Call Transcript - FINV Q3 2022

Operator, Operator

Hello, everyone. Thank you for joining the third quarter 2022 Earnings Conference Call for FinVolution Group. Today's call is being recorded. I will now hand it over to your host, Jimmy Tan, Head of Investor Relations for the company. Jimmy, please proceed.

Jimmy Tan, Head of Investor Relations

Thank you, Anthony. Hello, everyone, and welcome to our third quarter 2022 earnings conference call. The company's results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company e-mail 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 measure 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. Feng Zhang. Please go ahead, sir.

Feng Zhang, CEO

Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. With China's macro environment rebounding gradually from the low points of the second quarter, our domestic operation is also demonstrating progressive improvements. Powered by our proven strong track record and strategic execution, our industry-leading technological capabilities and our diversified borrowers across China, our business remained resilient. We continued to deliver solid financial and operational performance despite rolling lockdowns affecting multiple cities in China. Although we are experiencing pockets of improvements in terms of both pandemic restrictions and the macro environment, our operations in the third quarter remain challenging. We continue to adeptly navigate these challenges by leveraging our advanced technological capabilities as well as our experienced management team of seasoned leaders who have successfully traversed multiple credit cycles during our 16 years of operations. Our total transaction volume in the third quarter reached RMB 45.5 billion, representing sequential growth of 10% and year-over-year growth of 19%. Concurrently, our total outstanding loan balance reached RMB 60 billion, representing an increase of 7% sequentially and 34% year-over-year. With the completion of our business transition, our proportion of category A and B borrowers in the domestic market who meet our highest credit standards further expanded to 75% of our total borrowers in the third quarter compared to 58% in the same period last year. We are also pleased to share that we have completed our pricing transition and the current average borrowing rate for our loan is around 23%, reflecting our commitment to promoting financial inclusion as well as our increased compliance level and alignment with the regulatory directives. Technological innovation remains the cornerstone of our operation, empowering us to achieve consistent performance during challenging periods. Ongoing adjustments have been made to our credit risk assessment models, adapting to the COVID lockdown environment, which enabled steady and progressive growth while our risk performance has fluctuated even during the Shanghai lockdown. These solid operational results are mainly due to our sophisticated cutting-edge technologies such as Magic Cube, our all-in-one fund management platform, which supports a wide variety of protocols and effectively matches institutional funds with borrowers in real time. It can operate up to 55 fund management projects simultaneously with a daily processing capability of over 50,000 cases. Boosted by a prudent and effective risk management framework, coupled with reliable credit risk assessment models and fraud detection system, we have improved our risk metrics on multiple fronts. Our day 1 delinquency metric was 5.5% in early November, while delinquency rates below 90 days as of September showed further improvement to 1.34% from 1.44% in the previous quarter. As the impact of rolling lockdowns become more manageable, we expect our vintage delinquency rate for the third quarter to remain stable at around 2.3%. Encouragingly, our loan collection recovery rate also remained stable and strong at above 90%. Separately, we continue to take a prudent approach towards supporting small business owners. In the third quarter, we served a total of 504,000 small business owners and facilitated RMB 11.3 billion of loans for this segment, representing 25% of total transaction volume, an increase of 43% from the same period last year. Our small business owners are spread across various Chinese cities in different industries, such as retail, wholesale and light manufacturing, among others, which further reduces our related risk through geographic and sector diversification. We would also like to highlight that around 60% of our small business owners have been in operation for more than 3 years, illustrating their overall stability. We will continue to monitor the economic recovery and gradually adjust our strategy to keep up with the pace of small business recovery. Moving on to our international expansion. We are very excited to report that with improvements across multiple operational fronts, revenue contribution from this segment reached 12% of total revenue in the third quarter, marking the first time our overseas revenue contribution exceeds double digits. We also refined our international branding strategy, producing stellar results across numerous operational metrics such as number of downloads, number of new registrations and conversion rates. These achievements earned our AdaKami application a spot on Apple Search Ads Success Stories page, a notable commendation of our strategy's effectiveness in reaching new audiences. With stronger branding in the local market, our transition to better quality borrowers in Indonesia has outpaced our expectations with the proportion of better quality borrowers in the third quarter expanding to 68% from 62% in the previous quarter. Coupled with Indonesia's improving macro environment and an easing COVID-19 policy, this brought transaction volume in international markets to RMB 1.1 billion, representing a sequential increase of 22% and a year-over-year increase of 6%. The ongoing transition to better quality borrowers also helped us deepen our relationship with local funding partners, evidenced by an expansion in the proportion of loans they've facilitated to 48% in the third quarter compared to 39% in the previous quarter and in sharp contrast to 0 local funding in the same period last year. Looking ahead, we are confident in our ability to further increase the proportion of loans funded by local financial institutions as we secure more local funding partners with a large number of better quality borrowers. Even more excitingly, our international outstanding loan balance reached RMB 640 million, representing a sequential increase of 33% and a year-over-year increase of 88%. Our outstanding performance in the Indonesian market clearly demonstrates that we can leverage our technologies and business models in the overseas market. Going forward, we are confident that the revenue contribution from international markets will continue to increase and that we can replicate these achievements in the Philippines and other suitable countries. Last but not least, I'd like to provide an update on our ESG performance. We continue to make strides in advancing our ESG initiatives and doing our part for the environment. Notably, we obtained the ISO 14064 verification from SGS, a well-known international standard certification organization. ISO 14064 provides industry and government with a set of tools to develop programs aimed at reducing greenhouse gas emissions. This verification is a powerful global acknowledgment of our sustainable efforts in pursuing carbon footprint reduction and will ensure that our reporting is reflected internationally. In summary, our stellar results in the third quarter of 2022 speak to our resilient business model, state-of-the-art technologies and extensive operating experience and resources. Looking ahead, we will continue to focus on acquiring better quality customers, refining our credit risk profile and management framework while pursuing premium quality growth opportunities in China and abroad. Taken together, we believe that these efforts will position us to smoothly navigate the rapidly evolving market while delivering sustainable growth and creating great value for our customers, shareholders and all stakeholders. With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our financial results for the quarter.

Jiayuan Xu, CFO

Thank you, Feng, and hello, everyone. Welcome to our third quarter 2022 earnings call. In the interest of time, I will not go through all of the financial items on this call. Please refer to our earnings release for further details. As Feng mentioned, despite multiple operational challenges in the third quarter, we are encouraged that our quarterly results were in line with our expectations, including quarterly transaction volume improvement in risk metrics and a strengthening in our international business, among others. With a larger number of high-quality borrowers, coupled with our successful pricing transaction and advanced technologies, our founding partners are more willing to offer us attractive interest rates, evidenced by our funding cost improvement to 7.1% in the third quarter from 7.5% in the previous quarter. In addition, a cumulative number of our institutional partners expanded to over 70 with a robust pipeline of potential partners in place. Going forward, we plan to diversify our funding channels through ABS and secure a wide range of financial institutions to further optimize our funding cost. Driven by our efforts to optimize our operations, effective execution of our overall strategy and the skillful deployment of our technological capabilities across business, our net revenues for the third quarter grew to around RMB 3 billion, up 18% year-over-year. We also delivered a healthy non-GAAP operating profit of RMB 683 million. Our capital-light model proportion also remained stable at around 18%, and we expect to maintain this proportion near the current level going forward. Furthermore, our leverage ratio, which is defined as the risk-bearing loan balance divided by shareholders' equity, remained stable at 4.2x. Thanks to the continuous improvement in volume costs, our stable risk performance and consistent investment in research and development, we have managed to maintain positive results in our business operations. Going forward, we will continue to closely monitor the trends in funding costs and risk metrics. Between January 2022 and October 2022, we deployed around USD 40 million to buy back our shares in the public market. Since we initiated our share repurchase program in 2018, we have cumulatively deployed around USD 171 million to buy back our shares on the public market, a testament to the company's commitment to returning value to shareholders on a long-term basis. Before I conclude my remarks, let me provide some additional color on our business outlook for the fourth quarter of 2022. Despite the challenging macro environment in China, we will continue to forge ahead by strengthening our international initiatives, optimizing operational efficiency, reinforcing our successful transition to higher-quality borrowers and propelling technological innovation. We would like to reiterate that our total transaction volume guidance for full year 2022 remains unchanged in the range of RMB 175 billion to RMB 180 billion, representing year-over-year growth of 27% to 31%. With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue.

Operator, Operator

Our first question will come from Yada Li with CICC.

Yada Li, Analyst

Okay, then I will do the translation part. So the first one is compared with our peers, and we will achieve higher growth rates on lower origination value aiming the slowing growth of the whole consumer finance market. So could you please elaborate more about the reasons? And looking forward, is it possible that we can keep growing at a higher growth rate compared with the market and our peers? So this is the first one. And the second one is regarding the international business. So how much it will contribute to our new loan sales and the total revenue by the end of this year and next year?

Jimmy Tan, Head of Investor Relations

Yada, this is Jimmy. Let me do the translation for Alexis. During the third quarter, the situation still remained complicated. For example, in the second quarter, we experienced a Shanghai lockdown and consumer confidence is still relatively weak. And of course, the resurgence of COVID-19 has affected the macro environment with rolling lockdowns. And despite the macro environment remaining largely unchanged, we still managed to achieve positive results. Total loan origination volume in the third quarter reached RMB 45.5 billion, validating the resilience of our business. This is due to several reasons. For example, our experience accumulated in navigating multiple credit cycles; our successful business transition to better quality borrowers, which enabled us to achieve positive results during uncertain times; and also our technological capabilities accumulated over the years. Let me share an example of the COVID situation with you. For example, when we encounter a situation of lockdown, we will make ongoing adjustments to refine our risk models tailored to different categories of risk areas such as low, medium, high. When an area has been identified as a risk area, we will monitor and make the necessary adjustments to the models and rules within 2 days, and specific strategies will also be tailored for different areas. As a result of our proactive strategy, we have made very positive improvements. For the outlook, the macro environment is complicated and without major changes in the core policies and with the uncertainty still persisting in the economy. Although loan demand remains stable, but there might be some fluctuations in the future. And in the longer term, we are still very confident of the growth in China consumer markets. Yada, let me do the translation for Alexis again. Our international business transitioned to a better quality began in the second half of 2021, and we have also reported successful transitions in different stages since the last quarter. During the third quarter, we continued to strengthen our international business and revenue contribution from this segment reached double digits of revenue contribution in the first half this year. Transaction volume in the third quarter reached RMB 1.1 billion, representing a sequential increase of 22% and concurrently, outstanding loan balance also reached RMB 640 million, representing a sequential increase of 33%. Going forward, we are confident we can grow our international markets because the policies in Indonesia and the Philippines are much more confirmed right now. In the Indonesian market, our transaction volume is increasing along with the transition to better quality borrowers. In the third quarter, our proportion of better quality borrowers increased to 68% compared to 62% in the previous quarter. With a larger or better quality borrowers, we are actually working with more local financial institutions right now. We are working with Bank Jago and another 2 local financial banks. Going forward, we are confident we will further increase the proportions of loans funded by local partners. For the situation in the Philippines, we are confident to replicate our success there and in other suitable countries. We are also actively exploring new products such as working with hypermarkets to develop consumption scenarios. Besides Indonesia and the Philippines, we are also actively evaluating new countries and markets searching for suitable local partners, looking for licenses, and we believe our technologies and capabilities can be leveraged into more countries and financial institutions. We believe the growth in the international markets will continue at double digits with continued increase in revenue contribution.

Operator, Operator

Okay. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, we ask that you please kindly repeat your question in English. Our next question will come from Alex Ye with UBS.

Alex Ye, Analyst

I have two questions. The first one is about your outlook for next year. I understand that you can't provide guidance for the upcoming year, but I would like to hear your perspective on your direction and strategy. With the recent discussions around China's reopening and the concrete measures being implemented, how do you plan to balance growth with risk management next year? If China proceeds with the reopening next year, how would that influence our growth pace? What indicators or activities should we look for to feel more confident in our growth? The second question pertains to your sales and marketing expenses for this quarter, which have increased significantly. Can you clarify how much of this increase is due to domestic versus international markets? What are the primary drivers behind this increase, and what is your outlook moving forward?

Jimmy Tan, Head of Investor Relations

Alex, this is Jimmy. Let me do the translation for Alexis. Let me share the company's strategy with you. We are not only a domestic business but also have an international business. The global situation is still complicated and if you take a look, there are different policies in each different country. What we are trying to do now is to pursue high-quality growth. This can be reflected in a number of ways. For example, increasing the overseas market revenue contribution and penetration into more markets and finding the right customers. These customers will have much more loyalty and be much more resilient in a complicated environment. Furthermore, we aim to have an appropriate balance sheet with sufficient cash business and manageable leverage to navigate challenges in the competitive environment. Alex, let me do the translation. The environment in China is much more complicated; although we have seen positive signs resurging in the recent days, the impact on the economy is still uncertain at an overall level. We will still need to monitor certain signs, such as reports indicating the China consumer confidence index. Of course, we will make the appropriate adjustments when we see any improvement in these signs. Alex, let me clarify. From the profit and loss perspective, our sales and marketing expenses have been rising. However, when examining our metrics from a lifetime value standpoint, the outlook remains strong. Our funding costs in the third quarter have notably improved, providing us with more flexibility for a healthy lifetime value. Our borrowers maintain a lifetime value of over 36 months. In the third quarter, we also increased our customer acquisition efforts compared to the second quarter, which explains the rise in sales and marketing expenses. Nevertheless, in the fourth quarter, we have started to see positive changes in customer acquisitions, and our costs have decreased by approximately 10%.

Operator, Operator

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

Frank Zheng, Analyst

This is Frank from Credit Suisse. I have 2 questions. The first is a follow-up on the international markets. Can you provide more color on the take rate of the international markets as we see in terms of revenue contribution, they account for around 12%, but in terms of volume or outstanding balance is still quite small? And also, in terms of net profit, what is the proportion that international markets contribute? The second question is on SME owners' loans. Around 25% of loan volume is for SME owners. As we understand, SMEs tend to be more cyclical and sensitive to the macro environment. What kind of credit quality trend have we observed? Any notable difference compared to consumption loans?

Jimmy Tan, Head of Investor Relations

Frank, this is Jimmy. Let me do the translation. The Indonesia market is our main focus right now, and it is very different from the China market in terms of pricing, risk and the profile of the borrowers. Our product is 100% compliant with the regulators and we are also in the process of shifting to better quality borrowers. The take rate is stable and if you compare it to the China market, it is much higher at around 10%. For the net income contribution, it is still small. The main reason is that we are still reinvesting into the Indonesia market as we are still growing that portion of our business. Okay. Frank, let me do the translation. In the third quarter, we have served a total of over 500,000 small business owners and facilitated loan amounts of RMB 11.3 billion, contributing to around 25% of total transaction volume. Let me just remind you that our small business owners are a natural extension of our current business end-users, and they have an average ticket size of around RMB 20,000, which is not very large, and the risk is very manageable when compared to those SME loans. Although the impact of the lockdown is more severe for businesses, I would like to note that around 60% of our small businesses have been in operation for more than 3 years, and their overall stability and risk performance is better. In the past, we have observed that the risk performance of our small business and the performance of our consumer loans are at a similar base level. Going forward, we intend to make adjustments and strive to achieve better risk performance for our small business owners in different industries.

Operator, Operator

Our next question will come from Thomas Chong with Jefferies.

Thomas Chong, Analyst

My first question is about the overseas business. Given that we have been seeing SEA Grab and GoTo investing in the fintech business and a lot of progress is being made so far, I just want to ask about Indonesia and Philippine strategies, whether we should consider cooperation with them or if the market is big enough for us to go in on a standalone basis. And my second question is about the domestic business. How should we think about the SMB contribution in coming quarters?

Feng Zhang, CEO

Thomas, this is Feng. Let me try to answer your first question. Yes, I think it's a very good question. Overall, as Alexis has mentioned, we are very bullish about our overseas opportunities, particularly in Southeast Asia. If you look around the world, there are not many countries or markets as attractive as Indonesia and the Philippines. So these countries present, in our view, very good economic development opportunities and growth prospects, particularly for the consumer lending segment. When we look at them, it's very similar to China around 2014 in many respects. There are tons of opportunities. We have been in those markets for several years; therefore, we have established a frontrunner position and a very good competitive position. One of the things that makes us excited about these markets is that they are much more open from both regulatory and competitive perspectives, which are very different from our domestic China market. This bodes well for our growth potential and development opportunities and presents more possibilities for us to pursue initiatives that are not viable in our domestic market. This could include getting into POS financing, partnering with emerging giants like GoTo, or even venturing into segments like digital banking. These are things that are not quite possible in domestic China but are wide open opportunities here. I think as we continue to grow our business in these markets, we've established a very strong footprint. All these opportunities are possible, and we are very actively looking into these growth avenues.

Jimmy Tan, Head of Investor Relations

Thomas, let me do the translation. Based on the current environment, small business owners' loans will not be a main focus for our company. Going forward, we believe the current trend of around 25% will be maintained for our proportions of small business loans.

Operator, Operator

As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Jimmy Tan, Head of Investor Relations

Thank you all for joining our third quarter earnings conference call. If you have any further questions, please feel free to reach out to our Investor Relations team offline or online. Thank you so much.

Operator, Operator

This concludes this conference call. You may now disconnect your lines, and thank you.