Earnings Call Transcript - JFIN Q1 2020

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Jiayin Group's First Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we'll 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 Julia Qian, Managing Director of The Blueshirt Group Asia. Ms. Qian, please proceed.

Julia Qian, Managing Director

Hello, everyone. Thank you all for joining us on today's conference call to discuss Jiayin Group's financial results for the first quarter of 2020. We released the results earlier 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 RMB. With that, let me now 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.

Dinggui Yan, CEO

Mr. Yan will speak in Chinese and then our IR Director, Shelley Bai, will translate his comments to English. Go ahead, Mr. Yan.

Shelley Bai, IR Director

Hello, everyone. Thank you for joining our first quarter of 2020 earnings conference call. Despite the unprecedented global COVID-19 pandemic and the rapidly evolving market conditions, we made significant progress on many fronts.

Dinggui Yan, CEO

Shelley Bai, IR Director

Most importantly, we are close to completing the transition of funding sources to institutions. The proportion of loans funded by institutional investors increased to 44.5% in March. And right now, the number of institutions on the platform is 14, and they are funding nearly all new loans in Q2. This is a huge accomplishment that puts our business on a much more solid foundation. It is even more impressive, because we did it during the lockdown and the recovery period from the virus. I would like to thank our team for their dedicated efforts in making this happen. Right now, we are still in the process of attracting more financial institutions as our new sources of funding on our platform. We initiated discussions with an additional 22 financial institutions, in which over 70% of them are banks. We are pleased that we achieved some great progress with some of them and we look forward to their meaningful cooperation in the quarters ahead.

Dinggui Yan, CEO

I would like to thank our team for their dedicated efforts in making this happen. Right now, we are still in the process of attracting more financial institutions as our new sources of funding on our platform. We initiated discussions with an additional 22 financial institutions, in which over 70% of them are banks. We are pleased that we achieved some great progress with some of them and we look forward to their meaningful cooperation in the quarters ahead.

Shelley Bai, IR Director

Another achievement was keeping Q1 loan origination volume flat with the fourth quarter. This was also quite impressive in a period during which the countrywide lockdown impacted all aspects of daily life.

Dinggui Yan, CEO

We are pleased that we achieved some great progress with an additional 22 financial institutions, over 70% of which are banks, and we look forward to their meaningful cooperation in the quarters ahead. Another achievement was keeping Q1 loan origination volume flat with the fourth quarter, which was quite impressive considering the countrywide lockdown impacted all aspects of daily life.

Shelley Bai, IR Director

Furthermore, our optimized business structure enabled us to sustain healthy profitability. Quarterly net income was RMB39.5 million, up 74.9% sequentially. This is a great performance in an environment where many of our peers suffered losses. These accomplishments demonstrate the effectiveness of our prudent strategy as well as our enhanced risk management system and high asset quality.

Dinggui Yan, CEO

Our optimized business structure enabled us to sustain healthy profitability. Quarterly net income was RMB39.5 million, up 74.9% sequentially. This is a great performance in an environment where many of our peers suffered losses. These accomplishments demonstrate the effectiveness of our prudent strategy as well as our enhanced risk management system and high asset quality.

Shelley Bai, IR Director

We realized this is an accomplishment by executing on our strategy and managing our business with a core set of principles. Since starting our business, we have invested heavily in talents, systems, and technology. Our management team is professional and stable. Our risk management system is evolving through advanced analytics, behavior analysis, and algorithm-driven credit assessment. Our credit management has been excellent and our loan book is high quality. In fact, our credit loss adjustment under the new accounting policy is rather minor compared to our peers.

Dinggui Yan, CEO

We are managing our business with a core set of principles. Since starting our business, we have invested heavily in talents, systems, and technology. Our management team is professional and stable. Our risk management system is evolving through advanced analytics, behavior analysis, and algorithm-driven credit assessment. Our credit management has been excellent and our loan book is high quality. In fact, our credit loss adjustment under the new accounting policy is rather minor compared to our peers.

Shelley Bai, IR Director

Now, let me turn to developments on the regulatory front. We believe that the regulatory environment for our business is becoming much clearer. On May 9, 2020, the Citi IRC published a Consultation Paper regarding the administration of online lending by commercial banks. This is an urgent need for regulators to specify rules regulating the online lending business in order to promote the growth of the industry in a strong and compliant manner. That paper clarifies the types of partnerships and loan facilitation services in which banks and online lending platforms can be involved. We believe this is a positive and supportive sign from the regulators. During the pandemic, people recognized the fundamental importance of fintech services and online lending to the developing world. It has a unique ability to extend financial inclusion and improve the daily lives of people as per our growth. With our platform now fully transitioned to institutional funding sources, we are well positioned to drive net growth. We are optimistic because Chinese consumer demand is recovering and the regulatory requirements are becoming clear.

Dinggui Yan, CEO

During the pandemic, people recognized the fundamental importance of fintech services and online lending to the developing world. It has a unique ability to extend financial inclusion and improve the daily lives of people as per our growth. With our platform now fully transitioned to institutional funding sources, we are well positioned to drive net growth. We are optimistic because Chinese consumer demand is recovering and the regulatory requirements are becoming clear.

Shelley Bai, IR Director

Now we’ll turn the call over to our CFO, Charlie, to review the financials. Charlie, please go ahead.

Chunlin Fan, CFO

Thank you, Mr. Yan and thank you everyone for joining us. As Mr. Yan just mentioned, Jiayin delivered solid financial results in the quarter. In Q1, we continued to operate conservatively and efficiently. As we accelerated the transition from our individual investors to institutional investors, we still strive to reach a good balance between the two. Our loan origination volume was RMB2.9 billion, flat with Q4 2019. Despite the virus outbreak and the resulting lockdown, we still attracted customers with the right credit profile. Now, China has resumed business operations and we see early signs of recovery. In April, nearly all of our loans were funded by institutions. With this accelerated institutional partnership, we expect to resume growth in early third quarter. Now, turning to the financial results for the first quarter, please note that unless specifically noted, 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 would just highlight some of the key points here. Net revenue for the first quarter was RMB313.5 million, down 57.1% from the same period of 2019 due to decreased loan origination volume. As you may know, since the second quarter of 2019, we purposely decreased the outstanding loan balance, number of investors, and the number of borrowers. This was to comply with the government's so-called triple decline policy. Meanwhile, we shifted our focus to higher quality repeat lenders and repeat borrowers, which reduced our marketing spending and customer acquisition costs. In light of significant economic uncertainty during the pandemic, we remained vigilant on cost control in order to sustain margins and improve our operational efficiency. Again, we remained focused on serving repeat lenders and repeat borrowers with higher transaction amounts. We were also able to effectively reduce the sales and marketing expense and the costs related to loan originations. Total sales and marketing expenses fell to RMB93.4 million, down 45.5% year-over-year. At the same time, the average investment amount per individual investor was RMB91,318, an increase of 37.6% year-on-year. The average borrowing amount was RMB7,809, an increase of 8.1% year-on-year. This further demonstrated our strong brand recognition and the lenders' and borrowers' strong confidence in our protocol. G&A expense and R&D expenses fell to RMB38.3 million and RMB36.4 million, respectively. This was mainly due to lower share-based compensation expense allocated to G&A and R&D expenses. Due to stable loan originations, tight cost control, and improved operational efficiency, we were able to sustain healthy profitability. We posted a net income of RMB39.5 million, up 74.9% sequentially. As Mr. Yan just mentioned, this was a huge accomplishment, given the virus crisis and the temporary reduction in consumption. Turning to the balance sheet, we ended the quarter with RMB66.8 million in cash and cash equivalents compared with RMB122.1 million at the end of 2019. The cash reduction was mainly driven by our business transition and overseas strategic investments. In addition, I would like to talk about our recent accounting policy change, the adoption of CECL. Effective on January 1, 2020, in compliance with FASB requirements, we adopted the new accounting standard ASC 326. This introduced the forward-looking expected loss approach or current expected credit loss to replace the previous incurred loss methodology. Before CECL, credit losses were recognized only when the losses were probable or had been incurred. Under CECL, it is required that the full amounts of expected lifetime credit losses be recorded at the time the financial asset is originated on our clients. Adjustments for changes in the expected lifetime credit losses are made subsequently, which requires earlier recognition of credit losses that are deemed expected but not yet probable compared to the incurred loss methodology. However, as of now the adoption of the CECL has no major impact on the underlying profitability of our business. Jiayin has always focused on risk management and asset quality. The credit loss adjustment's impact on us was minor. The ongoing pandemic has had a material and extended adverse impact on the Chinese and global economies. We do expect gradual recovery in the second quarter. However, considering our business is in the process of making the transition, we expect our loan origination volume in Q2 will be relatively lower, like a similar level to Q1, but we are preparing for renewed growth and attractive results in Q3. Lastly, I have a statement to make with regard to our unusual stock price fluctuation yesterday. After making due inquiries, we are not aware of the reason causing such fluctuation. We believe we have been in good compliance with SEC and NASDAQ rules since our IPO, and that there is no material non-public information to be announced after our Q1 earnings release. With that, let's open the call for questions. Mr. Yan, Ms. Xu, our Chief Risk Officer, and I will answer questions. Operator, please go ahead.

Operator, Operator

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. We have our first question from the line of Craig Irwin of ROTH Capital Partners. Please go ahead.

Craig Irwin, Analyst

The first question that I have is about your sourcing of funding from institutional investors. I should say congratulations. The number in your prepared remarks, if I heard it correctly, 44.5% of Q1 2020 lending funded by institutions, that is strong continued progress, and I think you also said nearly all of Q2 lending backed by institutions. Can you share with us how many institutions are on your platform today, June 11, in the second quarter? And do you expect to continue diversifying lenders over the rest of 2020? Is there a specific number you want to reach this year? And how important is adding institutional lenders to your platform, to your longer-term growth plans?

Chunlin Fan, CFO

Thanks, Craig for your question. I think our CRO, Ms. Xu will take your question.

Xu Yifang, CRO

This is Yifang Xu. As we have commented on those opening remarks, our overall strategy is shifting from our P2P business model to a loan facilitation model. So as you have recalled that we have started this trend journey, on average, less than a year ago. You are correct that we are excited to report today that starting from April, our loan origination is now solely funded by institutional investors. There are 14 institutions that are onboarded and are working with us in Q1; as of now, we will continue to accelerate this effort to partner with more institutions. As of today, 14 is the number that we are reporting. Now, in this context, we have more than 20 institutions active in negotiation in our pipeline, and 70% of them are regional and city commercial banks. We continue to receive feedback from our institutional partners, and they have been very positive. The commentaries are all around the quality and the stability of our assets being outstanding in the industry. In addition, we are also seeking and deepening our relationship with our institutional partners, leveraging our core strengths and capabilities in online lending to benefit our institutional partners, including regional and city commercial banks. So, it's very important for us to continue to bring on more institutions to our platform to ensure the stability and the diversification of our funding sources. In addition to the loan facilitation models, we are seeking other possibilities of deepening partnerships with our partners.

Craig Irwin, Analyst

Thank you. My second question is about regulatory. So we observe that the Chinese government has released new rules for online lending by commercial banks. Can you talk about what the impact will be to Jiayin Group and the sector overall with these rules out? And do they directly apply to Jiayin and your peers?

Xu Yifang, CRO

So this is Yifang Xu, again, I'm going to take on this question. Overall, we view this regulation as beneficial to the industry, particularly to the leading players. It certainly promotes a healthier business development environment. The new rules, in a way, legitimized online lending platforms in terms of business operations and significantly reduced regulatory overhang. This marks a significant milestone for the online lending industry in China in the loan facilitation business. It shows that regulatory recognition toward the value brought by online platforms to commercial banks, in terms of better loan operation efficiencies and providing broader access to credit for consumers. So the regulatory development is in line with the anticipation that we are seeing; this is faster than before for both the industry as well as for the JFIN developments going forward.

Craig Irwin, Analyst

Thank you. My next question is about the quality of the loan book. The virus impacting the world seems to have had an impact on credit quality for loans by most of your peers, and many of them had large credit provisions this quarter, the March quarter, also for adopting ASC 326, the new accounting standard. So our assumption is, maybe the quality of their loan books wasn't as high as many thought. What is the delinquency status for JFIN? Can you talk about any changes to your loan book? And what's the impact of ASC 326 to JFIN? It seems like it's actually pretty minor.

Xu Yifang, CRO

Craig, for this question, I'm going to take it from the credit portfolio perspective. I'm going to ask Chunlin to comment on the institutions from the accounting standard perspective. As we have talked the last time, I would say that we at JFIN have always been following a very prudent and resilient approach to credit risk management; it is certainly core to our business operation philosophy. Since the very beginning of the outbreak, starting from January, we have taken a pretty cautious and conservative approach to loan origination, focusing on customers with better credit risk profiles, most of whom are repeat borrowers. Secondly, in terms of the loan portfolio as a whole, we have to report that COVID-19's impact on our business is modest, primarily due to geographic diversity. Most of our customers are not in the pandemic center. However, looking back, we have to say that during the most devastating period, especially in February, we also faced some mild operational challenges, particularly in collection operations, in terms of getting our employees back to work, as well as maintaining high health standards to protect our employees. As a result, we did see a modest uptick in the delinquency rate in that particular month. But as the market recovers from the aftermath of the coronavirus, we are glad to report that all the risk metrics have shown steady improvement back to normal, even better than the previous levels. Overall, with all these actions taken and how we managed through this challenging period, the virus outbreak's impact on our business is modest.

Chunlin Fan, CFO

Yes, Craig, I will give you more color about ASC 326, the new accounting policy required by the SEC. Just as our CRO, Ms. Xu mentioned, the asset quality of JFIN has improved over the past year since our IPO. We have been investing in our risk management system since the beginning of our business, and our continued prudent business operation and ever-improving risk management process, along with data and behavior analytics-driven credit assessments, have generated high quality loans. The credit quality of our book is very sound, and the credit losses were very limited, even with the new ASC 326 accounting standard. I think we are still in a very good position. As you know, in our Q4 2019, we reassessed all our loans, and we made a sufficient provision with good effort from our auditor, Deloitte. Thus, the actual provision for our Q1 is very limited compared to our peer companies. That's a very good number for us, which also proves that our asset quality management and risk management capability are first-class.

Craig Irwin, Analyst

That is very impressive. My last question is regulatory, but more related to the U.S. market listing and some of the things that may be reactionary going on in the United States right now. But the Senate approved a bill requiring Chinese companies to have their auditors submit to inspection by PCAOB, and then NASDAQ has proposed certain rule changes that really seem to be targeted toward many Chinese companies. I know the PCAOB regulates auditors, not public companies, and Jiayin Group is a very conservative company. Can you maybe discuss with us what you see the current status as representing the proposals? I think they have three years in terms of time to comply or resolve. But do you have a potential view on how you would handle things if they were to proceed as currently suggested?

Chunlin Fan, CFO

Yes, Craig, this is Chunlin. The relationship between China and the U.S. is quite complex right now. Everybody is concerned about this and everyone cares about this. Regarding the particular area in the capital market, I believe that the bill will pass the House of Representatives and be signed by the president to become law down the road, because in the Senate, both the Democrats and Republicans seem to agree that they will pass this bill. So I don't doubt that the bill will pass the House and be signed into law. The proposed law provides three years to resolve the issue of enabling the companies to comply with the PCAOB audit requirement. The issue of the inspection is not controlled by the companies. I mean, companies like Jiayin are too weak to voice our case, given that the PCAOB has jurisdiction over audit trends. Ultimately, I think it's pretty much a gamble between CSRC and SEC, and between China and the U.S. So since the total market cap of Chinese companies listed in the U.S. is nearly $2 trillion, we hope and believe that for the mutual interest of the U.S. and China, a mutual agreement will eventually be reached on both sides. We are working closely with our auditor, Deloitte, to keep monitoring the situation and the progress. The thing I can tell you is that JFIN will do everything we can to fully comply with U.S. accounting GAAP and all the SEC rules. Overall, there is a lot of uncertainty down the road, but we will remain positive and confident about the capital markets outlook in the U.S. and China.

Operator, Operator

Thank you. We have our next question from an unidentified analyst. Please ask your question.