Jiayin Group Inc. Q2 FY2020 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Jiayin Group Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today’s call. Now, I’ll turn the call over to Susie Wang, Director of The Blueshirt Group Asia. Ms. Wang, please proceed.

Hello, everyone. Thank you all for joining us on today’s conference call to discuss Jiayin Group’s financial results for the second quarter of 2020. We released the results early today. The press release is available on the company’s website as well as on newswire services. On the call with me today are Mr. Yan Dinggui, Chief Executive Officer; Mr. Charlie Fan, Chief Financial Officer; and Ms. Xu Yifang, Chief Risk Officer. Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company’s public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi. With that, let me turn the call over to our CEO, Yan Dinggui. Mr. Yan will speak in Chinese and then our IR Director, Shelley Bai, will translate his comments to English. Go ahead, Mr. Yan.

Please proceed, Mr. Yan.

Hello, everyone. Thank you for joining our second quarter of 2020 earnings conference call. We are pleased to report a solid quarter with significant business progress in the face of COVID-19 headwinds and ongoing regulatory uncertainties. Most excitingly, we have successfully transformed our business by transitioning the source of funding from individual investors to institutional partners. In Q2, loan origination volume facilitated by institutional investors reached 98.6% compared with nil in the same period of 2019. This was also up from 26.9% in Q1. This is a remarkable accomplishment, especially having achieved it during the COVID-19 pandemic. I would like to thank our team and our partners for making this happen with their dedication and superior execution.

We have fully transformed our business by shifting the source of funding from individual investors to institutional partners. In the second quarter, loan origination volume supported by institutional investors reached 98.6%, compared to zero in the same period of 2019. This also increased from 26.9% in the first quarter. This is an extraordinary achievement, particularly given that we accomplished it during the COVID-19 pandemic. I want to express my gratitude to our team and our partners for their dedication and outstanding execution in making this possible.

Since the beginning of April, all new loans were funded by institutions. We successfully transformed ourselves from a P2P company to a financial technology company with multiple strategic institutional partners and great potential for growth. Most notably, we maintained healthy profitability. Considering that our loan origination volume was down over 20% from the prior quarter, it was a significant achievement to generate net income of RMB41.1 million in Q2, which was even up slightly from Q1. This fully demonstrates the effectiveness of our corporate control approach and our improved operating efficiency. We are poised to execute this rapid and smooth transition without disrupting our business operations. We will continue to onboard new institutions and deepen relationships with existing ones in order to drive loan growth. As the economy recovers and consumption rebounds, we’ll further expand and diversify our institutional funding sources and continue to work on driving down our funding costs. We think that we are well-positioned to resume attractive top line growth.

We have demonstrated our operating efficiency and are ready to carry out a rapid and seamless transition without affecting our business operations. We will keep bringing on new institutions and strengthening ties with our current partners to promote loan growth. As the economy recovers and consumer spending increases, we will broaden and diversify our sources of institutional funding while continuing efforts to reduce our funding costs. We believe we are in a strong position to achieve appealing top line growth.

With the success of our business transition, we were able to leverage our technology and operational capabilities to empower some business platforms to better serve their small to medium enterprise customers. To advance this, we have made significant progress across our partnership goals. We believe this partnership will create more application scenarios for our business and further expand our high-quality borrower space. We expect to deliver more detailed progress in the third quarter.

With the success of our business transition, we were able to leverage our technology and operational capabilities to empower some business platforms to better serve their small to medium enterprise customers. To advance this, we have made significant progress across our partnership goals. We believe this partnership will create more application scenarios for our business and further expand our high-quality borrower space. We expect to deliver more detailed progress in the third quarter.

Besides our successful business transition in Q2, we remained prudent in our operations with increased efforts in risk management and credit assessment. In order to ensure a high-quality borrower base, we focused on serving repeat borrowers, who have better average credit quality. You can see this in our repeat borrowing rate, which was 72% in Q2 versus 60.8% a year ago. The increase in the repeat borrowing rate improved our credit risk profile. In addition, we tightened our risk management policies and improved our credit scoring system by utilizing advanced data analytics, behavior analysis, and algorithm-driven credit assessments. The economy is recovering and our credit quality is improving. We will encourage you to see many operating metrics showing improvements in Q2.

Our repeat borrowing rate increased to 72% in Q2, up from 60.8% a year ago. This rise has enhanced our credit risk profile. We have also tightened our risk management policies and enhanced our credit scoring system using advanced data analytics, behavior analysis, and algorithm-driven assessments. With the economy recovering, our credit quality is also on the rise. We encourage you to review the numerous operating metrics that indicate improvements in Q2.

On the regulatory front, last week, the Supreme People’s Court of the PRC announced new guidelines to court-mandated interest rate caps for private lending. The saving will be kept at four times that of the LPR. This guidance is being interpreted and discussed. However, it appears that the new guidelines are only applicable to private lending. Since we successfully completed the transition into institutional funding, we expect the impact on operations to be minor and manageable. Meanwhile, we will also prepare for the possibility that these guidelines may apply to institutional lending as well. As one of the leading Fintech platforms in China, our management team can navigate these sorts of changes. We are not concerned. Our platform and system are sophisticated and have the capability to offer different rate products to different risk-profile borrowers. We continue to work closely with our institutional partners to better serve our borrowers and grow our business while complying with all applicable regulations.

我们管理团队能够应对这些变化，作为中国领先的金融科技平台，我们并不担心。我们的平台和系统复杂，能够为不同风险特征的借款人提供不同的利率产品。我们将继续与机构合作伙伴密切合作，以更好地服务我们的借款人，并在遵循所有适用法规的同时发展我们的业务。

To conclude, we expect our growth to resume in Q3, with our platform now fully transitioned to institutional funding sources. We are confident that Jiayin is well-positioned to emerge from short-term challenges with an optimized business model and strong execution capability.

We continue to work closely with our institutional partners to better serve our borrowers and grow our business while complying with all applicable regulations. To conclude, we expect our growth to resume in Q3, with our platform now fully transitioned to institutional funding sources. We are confident that Jiayin is well-positioned to emerge from short-term challenges with an optimized business model and strong execution capability.

Thank you, Mr. Yan and Shelley, and thanks to everyone for joining our call today. As Mr. Yan just mentioned, in Q2, we achieved healthy profitability despite unfavorable market conditions. More excitingly, this is a quarter in which almost all loans were funded by institutional partners, providing very clear evidence that our institutional funding structure is efficient, sustainable, and profitable. Our strategy is unchanged. We will generate top line growth by increasing loan origination volume while optimizing operational cost, improving credit quality, and maintaining healthy profitability. Now, let me briefly go over the financial results for the second quarter. Please note that unless specified otherwise, all financial figures are in RMB. 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. I will just highlight some of the key points here. In the second quarter, lower loan volume drove the decline in our top line metrics, as you would expect, given the market conditions and our stringent risk policies. Net revenue for the second quarter was RMB245 million, down 61.5% from the same period of 2019. Going forward, we’re ready to resume the growth of fundings. And funding is now all from institutions. Moving to costs, the cost reduction efforts we initiated this year are bearing fruit. You can see this in our much lower operating expenses this quarter. Total operating expenses were RMB197 million, down 24.9% sequentially. This brought us a healthy operating margin of 19.6% versus 16.3% from the prior quarter. We will continue to evaluate ways to optimize our cost structure and further improve our operating efficiency. Origination and servicing expense was RMB50.9 million, down 60.1% year-over-year, primarily due to lower loan origination volume. Allowance for uncollectible receivables and contract assets was RMB10.7 million, down significantly from RMB70.8 million in the same period of 2019. The decrease was primarily due to two factors: first, the lower loan origination volume; and second, our increased efforts in credit assessment and risk management, which optimized our loan performance. General and administrative expense and R&D expense fell to RMB36.6 million and RMB34.1 million, respectively. This was mainly due to the decreased share-based compensation expense allocated to G&A and R&D expenses, as well as the decrease in traveling and other business-related expenses. Sales and marketing expense was RMB64.6 million, down 56.9% year-over-year. This was mainly due to better sales efficiency, a further benefit of satisfying the demand of repeat borrowers. Due to our tight cost control and improved operational efficiency, we were able to sustain healthy profitability. We posted net income of RMB41.1 million, up 4.1% sequentially. Turning to our balance sheet, we ended the quarter with RMB69.9 million in cash and equivalents compared with RMB66.8 million as of March 31, 2020. In summary, as we see recovery in the Chinese consumer economy, we expect loan origination volume in Q3 to be higher than in Q2. With that, let’s open the call for questions. Mr. Yan; Mr. Xu, our Chief Risk Officer; and I will answer questions. Operator, please go ahead.

Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Andrew Scutt from ROTH Capital. Please ask your question.

Hey, good morning, and thanks for taking my questions. My first question is regarding the rate cap. It’s a two-parter here. So first, can you just please share the portion of your loan book that’s above and below the cap? And then additionally, now that you guys are fully funded by institutions. Do you see any other regulatory issues that may need to be resolved?

Okay. This is Yifang Xu. Thanks, Andrew. I’m going to take on your questions. So your first question is about the rate cap. I’d like to answer this in two parts. So related to the rate cap, first I want to make a point that our general understanding of the decision is it only applies to private lending, not to licensed financial institutions. So as we have successfully made the transition, our business model today is solely operating with institutional funds. So we are closely working and anticipating details related to that implication for the regulated financial institutions. So with our partnership goals being fully compliant with the legal requirements on all funds, including product pricing, is critical to our partnership. So we are definitely committed and will continue to follow that guidance to meet our requirements from our institutional funding partners. Now let’s go back and look at that 15.4% rate you’re referring to about how our loans are priced above or below. Here’s how we think of our capabilities in originations regarding our pricing for differentiated risk-based pricing. Currently, our loan portfolio origination volumes are running at all-time high since we started making the transition into our new business model, which is funded by the institutional partners. So with that volume in mind, now our assessment is based on our risk assessment; about 70% of our new origination today was still marketable. So we were able to exercise this new rate cap. But, of course, with that 70% of new origination under this new rate cap, the profitability margin is going to be centered, given today’s cost of funds and operational efficiency. In line with our overall strategic goals to move to better credit across our customer segments, we anticipate this percentage will have a material increase from a continuous focus on improving our credit management capabilities. Additionally, the improvements and enhancements in the cost of funds, as well as operational efficiencies will help with our economics. That addresses your first question. The second question related to whether we anticipate further changes from the regulatory requirements? So far, it’s hard for us to focus. But again, we are watching how things evolve and are anticipating more details related to how the changes today relate to whether or not there will be more specifics related to rate requirements for the licensed institution partners. Thank you.

Great. Thank you. That was very helpful. And then congrats again on the achievement of institutional funding and very exciting that you guys are now in a position to return to growth. So just a quick question on loan growth. Just wondering kind of the cadence of growth you guys are expecting. How quickly do you think you should be able to get back to the growth you experienced before the triple decline policy was put into place? So just any commentary you guys can provide around that would be great?

Okay. Thank you, Andrew. So I’m going to take on this question again. In terms of the growth, we’re going to comment on two parts: one is from our funding source cost, the other is from our lending capabilities. After we managed this transition, our loans are now fully 100% funded through institutional partners. We’ll continue to grow our institutional funding source pipeline to enable future growth. Regarding the lending capability, I stated earlier that we are confident and happy to share that our origination volume is now at a historical high since we started this transition over a year ago. Just to give a sense of what the numbers are like, our July and August volume combined is already slightly exceeding our Q2 number. Looking forward, I would say that it continues to be a dynamic process that we have to maintain our economics while keeping a balanced view on our credit costs, operational costs, and overall volume. What we are trying to achieve is really to have a healthy and balanced growth trend, probably between mild to generous growth. So yes, it’s unlikely we will see very short exponential growth in volume as we did before the triple decline policy started, because we are simultaneously focusing on both growth and continuing to improve credit performance. We can look into more details regarding both repeat customers and new origination. There are several levels to pull, other than what we earlier mentioned about improving operational efficiency and cost of funds. For our repeat customers, we are already focusing on expanding our product offering, particularly to better credit-profile customers. We are also focusing on reaching new customers through social media platforms and partnerships with some vertical business applications. We’ll continue to optimize and expand these channels while staying focused on our new target segments, which are the better credit segment customers. This will be a continuous optimization process. We’re going to keep a balance between cost of acquisitions, credit costs, and growth opportunities. Overall, we feel pretty confident we will achieve our expected volume growth while keeping the overall book healthy. Does that answer your question?

Great. Thank you. Yes, that was perfect. I really appreciate the detail you provided there. And then just last question for me, just a quick one. Do you mind commenting on the credit quality of the loan book right now? And have you guys seen the improvements that a lot of your peers have reported in this past quarter?

Okay. I will still take this question. Let’s go back to the pre-COVID period. Unlike some of our peer companies, we have taken a proactive approach to manage credit risk early on in January by shifting our originations towards our repeat customers and those with better credit profiles. This was also pointed out by Mr. Yan early in his remarks. In addition, we have maintained agile collection operations and other operations to quickly adapt to the new operational environment. Therefore, in our last earnings call, we noted that we didn’t see a material deterioration in our credit risk metrics, which differs from quite a few of our peer companies. Today, we are happy to share that we have increased our speed on new origination, and the volume has gone up. However, our credit metrics are still trending in a positive direction. It’s not a significant turnaround compared to our peers, but we are observing positive enhancements thanks to the diligent and relentless effort from our team focusing on improving credit risk and management capabilities. Does that answer your question?

Yep. Great. Thank you. Thanks again, and congrats on the quarter. That’s all for me.

There are no further questions at this time. I would now like to hand the conference back to these presenters for the closing remarks. Please go ahead.

Thank you, operator, and thank you all for participating on today’s call, and thank you for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.