Jiayin Group Inc. Q2 FY2021 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Jiayin Group Second Quarter of 2021 Earnings Conference Call. 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. If you have any objections, you may disconnect at this time. I will now turn the call over to Ms. 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 2021. We released results earlier today. The press release is available on the company’s website as well as from Newswire Services. On the call with me today are Mr. Yan Dinggui, Chief Executive Officer; Mr. Xu Yifang, Chief Risk Officer; and Ms. Shelley Bai and Ms. Delia Chen, Co-Chief Financial Officers. 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 actual results may be materially different from 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 now turn the call over to our CEO, Yan Dinggui. Mr. Yan will speak in Chinese, and then our Co-CFO, Shelley Bai, will translate his comments to English. Go ahead, Mr. Yan.

Hello, everyone. Thank you for joining our second quarter 2021 earnings conference call. We delivered an outstanding quarter, achieving record-breaking operational and financial results as loan origination volumes progressively increased by 153% year-over-year with 100.9% growth in revenues. These results are strong testimonies to the success accomplished in implementing our key strategy, driving organic growth in China while deepening partnerships with financial institutions through leveraging our sophisticated risk management systems and providing individual customized solutions. Notably, with the strong top line growth and outstanding execution in cost control policy, strong momentum in profitable growth continues. Net income grew a significant 208.5% year-over-year, reaching RMB126.8 million. This is a remarkable improvement and illustrates our ability to improve profitability through strong growth and outstanding execution. As shared with you in the last few quarters’ earnings calls, we are focused on building integrated highly automated platforms with great risk management intelligence to be an irreplaceable effective partner to our institutional funding partners. Our funding partners increased to 52 in Q2 and we are in discussion with another 45 institutions, which aims to further broaden partnerships for diversifying our funding resources, while maintaining risk management excellence. Our ability to provide assets with qualified risk profiles that meet the requirements for respective funding partners made a solid foundation for higher loan originations. In this quarter, we resumed marketing and began attracting new borrowers at a more accelerated pace. We focused on maintaining higher quality borrowers. A large portion of our loan volume continued to go to our existing borrowers with higher quality. With our repeat borrowing rates for this quarter at 72.4%, we believe serving higher quality borrowers will improve our credit risk profile and ensure asset quality. We are very pleased with the progress, and excellent financial results illustrate the strength in the consumer market and the growth trajectory of our business. We remain dedicated to controlling credit quality with our improved credit scoring system and advancing our technology capabilities. In terms of overseas markets, we are taking a more prudent approach due to uncertainties brought by the third wave of the Delta variant and margin dilution by heightened competition. Nigeria, Indonesia, and Mexico are our key overseas markets that present promising business potentials, with our progress in these markets being gradual and steady. We are striving for a good balance between investments and risks. We expect to have a better picture later this year depending on geopolitical changes, virus control, and improvements in global monetary policy. Agility and prudence are both critical factors in our business strategy which will enable us to emerge stronger and achieve more success in this evolving market environment. We completed the integration with Bweenet this quarter. As you might be aware, the recent crackdown on Bitcoin mining in China has affected market sentiment and posed temporary challenges to immediate mining prospects. However, Bweenet is primarily focused on blockchain-related technologies and hardware solutions for decentralized applications. We provide our clients with one-stop solutions related to cloud storage, cloud computing network bandwidth, content delivery networks, and others. As blockchain-based applications are developing rapidly, we are confident we can benefit from this growing market with our first mover advantages and technology capabilities. In conclusion, we are excited about the resumed high growth in our domestic market with our record-breaking operational and financial performance this quarter. We will continue to rollout initiatives and apply technology across our business to improve operational efficiency and create long-term sustainable value for shareholders. With that, I will now turn the call over to our Co-CFO, Delia Chen. Delia, please go ahead.

Thank you, Mr. Yan, and Shelley, and thank you everyone for joining our call today. As Mr. Yan mentioned, we achieved a milestone quarter and grew our internet volume by 153% to RMB5,663 million, with 100.9% growth in revenue and 208.5% in net income. This outstanding result came in well above the upper end of our guidance range on a year-over-year basis, demonstrating the success of our business transformation as well as our speed and strong execution in enhancing our risk management and improving asset quality. Now, let me go through our financial highlights for the quarter. Please note that unless stated otherwise, all numbers quoted are in RMB and percentage changes refer to year-over-year comparison. Net revenue was RMB492.2 million, up 100.9%. Revenue growth was primarily driven by the significant growth in loan origination volume, which increased 153%. Other revenue was RMB38.5 million, down 8.3%. This decrease was primarily due to reduced revenue from P2P-related services as the company no longer supports the legacy P2P lending business, partially offset by increased revenues generated from our overseas business and Bweenet since the integration in May. Moving on to costs, we also had a substantial improvement in operating efficiency, reflecting actions we took over the last two years to streamline our expense base. In the second quarter, total operating costs and expenses were RMB342.6 million, up 73.9% from RMB197 million last year. The increase was along with our top line growth. However, total operating costs and expenses as a percentage of revenue was 69.6% versus 80.4% in the same period last year, demonstrating our ability to contain expenses growth, which will enable our infrastructure to scale as we grow. Origination and servicing expenses were RMB83.2 million, up 63.5%, primarily due to the increase in credit assessment expenses resulting from higher loan origination volume. In this quarter, we incurred a cost of sales of RMB5 million, which is equivalent to $0.8 million, compared with nil from the same period of 2020. The increase was primarily due to the cost of hardware sold by Bweenet. Allowance for uncollectible receivables, contract assets, loan receivables, and others were RMB13 million, up 21.5% from the same period of 2020. The increase was primarily due to an increase in loan principal and higher origination volume from our overseas business, partially offset by the decrease in the estimated default rate under the current business model since we no longer support the legacy P2P lending business. G&A expense was RMB35.2 million, down 3.8%, primarily due to the decrease in headcount, which has been partially offset by the increase in personnel-related costs allocated to general and administration departments. R&D expense was RMB31.9 million, down 6.5%. This was primarily due to the improved utilization of our facility allocated to the research and development department, which has been partially offset by the increase in professional service expenses as the company continues to enhance its research and development capabilities. Sales and marketing expense were RMB174.2 million, up 169.7%, primarily due to our new online advertisement and marketing strategy, which has resulted in higher customer acquisition expenses. As we intend to continuously grow origination volumes, we began attracting new customers at a more accelerated pace with our superior marketing algorithms and translating them into our loyal customer base. We achieved noteworthy profitability through our loan volume growth and improved operating efficiency. With positive net income of RMB126.8 million, up 208.5% year-over-year, we ended this quarter with RMB141.4 million in cash and cash equivalents compared with RMB123.3 million as of March 31, 2021. Moving to our guidance, we expect our loan origination volume to be between RMB27 billion and RMB30 billion for the full year 2021, representing 133% to 159% year-over-year growth. With that, we can open the call for questions. Mr. Yan; our Chief Risk Officer, Mr. Xu; and I will answer questions. Operator, please go ahead.

The first question comes from Craig Irwin from ROTH Capital Partners. Please proceed.

Hello and thank you for taking my questions. The most exciting number that you shared, I think, was the origination volume with more than RMB5.6 billion in the quarter. Can you talk a little bit about the contribution of customers – new customers added in the past couple of months and how quickly your funding partners contribute to these very high growth rates? Do we see a larger portion added on the front end? There is a new partner added? Or do the new partners tend to accelerate over time?

This is Yifang. Thanks, Craig, for your questions. I will take a stab at your question. So yes, as you have seen in this Q2, we saw a significant amount of volume increase over time. As we have disclosed in our notes earlier, the number of funding partners we’re working with have increased to 32%. We are a lot more diverse in terms of the types of FIs we are working with as well as the numbers are increasing. We are seeing both factors have impacted from bringing on new funding partners and deepening relationships with our existing partners that we have brought on board last year so that we are managing our partnerships while considering several factors, including regulatory changes over time. So, diversification is one of the crucial components for us to manage that to achieve a stable supply of funds. Now we have added different aspects in terms of the geographical compatibility of our growth profile because we are seeing some local regional requirements in terms of the type of customers some of FIs are acquiring and specifying. The last thing is also important is to continue to improve our overall economics and to achieve a lower competitive cost of funds. We have to manage to have a wide range of partners that we are working with to assist in terms of our business terms. I hope that answers your question.

Yes, it does. Thank you. So my next question, it’s obviously directly related to increased marketing spend to drive this accelerating origination volume. The margin spend was up materially quarter-over-quarter. And it’s amazing that you had such very quick results. I guess that with liquidity playing into the market spend and the new loan origination with the customers captured, can you please describe that process and maybe share some of the details of where you’re spending these increased marketing funds? And if you could also discuss how your budget on the total market spend? Are you targeting 30% operating margins? Or are you targeting a particular expense level as you continue to scale the business?

Yes. This is Yifang again. I’m going to speak to the first part of your question, and then maybe Delia can chime in on the last question. So yes, we are seeing a higher increase in our marketing expense, which is even on a per unit basis, we are maybe looking at higher sales and marketing costs per customer acquired. A couple of reasons for why we are seeing a higher cost on that item. One is we are continuing to really focus on better quality customers. And in the market that we are working on right now, the current market landscape, the cost of acquiring such customers is significantly higher than compared to what we have seen in probably 2019 or early 2020. The channels have also had significant changes compared to the early years. Today, we no longer see the no-mark type of market practice. We are acquiring our customers through direct channels a lot more, working with major internet companies to acquire the information to acquire customers directly. We are seeing almost – I would say, almost 100% growth in those new channels. The cost in the new channels are higher, but the quality is significantly better in terms of both approval rates as well as from the early risk meetings we are seeing. So, that’s the primary reason we are seeing the channel mix is shifting to a higher cost channel, and our focus on better quality customers is also driving the per unit costs up. From a planning perspective, we are still considering this to be healthy organic growth, especially considering the continuous interest trends we are observing from our financial institution partners in terms of the loan interest rates we have to work with. We are putting a stringent view on our risk spectrum to ensure we are not compromising our marketing per unit costs in exchange for higher future risks or uncertainties. So, we are balancing that, trying to maintain our growth for a future more healthy growth and targeting better risk quality customers while accepting some cost increases at this point. We do see that sales and marketing costs per unit are coming down in Q3. We have pretty good visibility of achieving probably 20% to 30% efficiency improvement in the pipeline right now. As we continue to grow in high-quality customer channels, our ability to manage that unit cost down is looking positive. In terms of the total budget, I would like to ask Delia to comment on that.

Yes. So, this is Delia. Thanks, Craig, for the question. I think compared to last quarter, we have seen a significant increase of over 90% in sales and marketing expenses. To provide more context, I think it’s mainly due to two reasons. The first is that the fee settlement method is different from before. In the previous method, we recorded fees based on performance metrics like cost per download or cost per sales. With the introduction of information feed advertisements this quarter, we started to record the marketing expense upfront, meaning we now record it based on cost per click or cost per thousand impressions. Therefore, you would see an initial bump in spending as we launched this new strategy. Secondly, the new logic of this marketing strategy involves partnering with channel providers, where we create models with them, conduct trials, and optimize our algorithms based on the feedback. At this initial stage, we are inevitably seeing higher costs per newly acquired customers. However, we expect to see improvements in cost effectiveness in the near future. Our technology team is working diligently to improve the cost per newly acquired customer metrics, so we are confident that in the next quarter, or over the coming months, this cost will decrease. Due to the various factors involved at this stage, we won’t be setting a specific number or ratio for our marketing and sales expenses compared to total loan origination volumes. However, we are confident that in the short term, it's unlikely that marketing and sales expenses will significantly exceed loan origination volume growth.

Thank you. So, can you share a little bit more detail around your international expansion and provide an update on Indonesia and Mexico and whether or not your other markets internationally are at this time?

Certainly, I will take on this question too. As we stated earlier, we remain optimistic about our international strategy and consider it one of the key components of our overall strategy. However, we are taking a prudent approach regarding the risks and uncertainties involved in the international market. The surge of the Delta variant has had a greater impact on emerging markets, differing from what we observe in the Mainland China market. Economic growth, political stability, and regulatory conditions are also more fluctuating compared to our Mainland China market. Nonetheless, we remain happy to report that in Mexico, we maintain our position as a top-tier player in the market despite seeing an influx of new competitors occasionally. We have also seen some months driving marketing costs up, which impacts our economics; however, we continue to be the leading player in Mexico. In Nigeria, we have completed the setup phase and obtained our money lending license. Our next step is to start driving growth in that market. In Indonesia, we are observing the impacts of recent regulatory changes related to the licensing application processes, which has slightly affected us. However, our dedication to the Indonesian market remains strong, as with our newer markets, we are currently in the early investigation and feasibility study phase. That said, recent political changes may impact our speed and willingness to explore new markets at this time.

Thank you for the update, and congratulations on the really strong profitability in the quarter.

Thank you.

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

Thank you. That concludes our conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.