Earnings Call Transcript - JFIN Q4 2022

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Jiayin Group’s Fourth Quarter 2022 Earnings Conference Call. As a reminder, we are recording today’s call. If you have any objection, you may disconnect at this time. I would now like to turn the call over to Mr. Shawn Zhang from Investor Relations of Jiayin Group. Please proceed.

Shawn Zhang, Investor Relations

Good day, everyone. Thank you all for joining us on today’s conference call to discuss Jiayin Group’s financial results for the fourth quarter and full year of 2022. We released the 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. Fan Chunlin, 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 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 the expectations expressed today. For the 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, Mr. Yan Dinggui. Mr. Yan will deliver his remarks in Chinese, and I will follow up with corresponding English translations. Please go ahead, Mr. Yan.

Yan Dinggui, CEO

Hello, everyone. Thank you for joining our fourth quarter 2022 earnings conference call. 2022 has proven to be both challenging and opportunistic for our company. During the year, we faced the strictest quarantine lockdowns in China followed by the lifting of almost all COVID restrictions in December. Looking back on the last three years, we witnessed the COVID outbreaks that disrupted businesses worldwide, policy changes that reshaped China’s fintech industry, and escalating geopolitical conflicts that further pressed the global economy. Despite these macroeconomic disruptions and increasing uncertainties worldwide, we are proud to report that our execution of our growth strategy remains steadfast. Throughout 2022, we maintained our focus on strengthening our core competencies of technology innovation and risk management. We also improved our innovation capabilities and efficiency in refining our operations to better meet the evolving market demands. As a result of our solid execution, we delivered growth in line with our expectations and rewarded our shareholders' long-term support with a strong and satisfactory performance in 2022. As we expand, our top priority remains ensuring full compliance with regulatory requirements, and we are actively collaborating with policymakers and partner institutions towards that goal. In response to the PBOC’s directive to stop direct data connections between Internet platforms and financial institutions, we have made significant progress in preparation. We are confident that we can work with our partner financial institutions to complete the system switchover within the required timeframe. Encouragingly, we are also seeing positive regulatory developments underway to support the healthy growth of China’s Internet platform companies. For example, the CBIRC’s interim measures for the management of commercial bank Internet loans have officially endorsed and regulated partnerships between banks and Internet platforms like ours, providing a solid foundation for our operations. Additionally, regulatory authorities recently announced that ratification among major Internet platform companies is mostly completed, and PBOC’s financial market department has also pledged to promote the healthy development of the platform economy. Overall, we believe that these regulatory developments indicate that China’s policy regulation of Internet platforms is moving towards a period of normalization. In 2022, the Chinese market experienced strong demand for consumer credit, driven by several factors. Firstly, the launch of the 14th five-year plan for promoting the development of small and medium-sized enterprises by 19 government agencies and the joint release of the notice on strengthening financial services for new urban residents by CBIRC and PBOC have spurred the growth of fintech products and services for both individuals and SMEs. Secondly, our financial institution partners have been able to provide abundant funding to meet the demand for loan facilitation services. In fact, PBOC reported an 11.1% year-over-year increase in the balance of our RMB loans by financial institutions in 2022, and the full-year RMB loan volume increased by RMB21.31 trillion, representing an additional RMB1.36 trillion increase from 2021. However, rather than broadly expanding our business scale, we chose to take this opportunity to improve the structure of our borrower base on our platform. In terms of borrower operations, we focus on enhancing the quality and scale of our borrower acquisition capabilities, adding approximately 1.53 million new borrowers throughout the year, a 52.4% increase from the previous year. We also increased the proportion of loans by borrowers with a credit score of 60 or above from 68% to 88% in 2022. Additionally, we concentrated on exploring borrower lifetime value and refining our operations. For high-quality new borrowers, we match them with funding sources, offering lower interest rates, promoting a year-over-year increase of 22.1% in the average borrowing amount. The average ratio of repeat borrowers for the four quarters in 2022 remains stable at about 67%. The average borrowing amount reached approximately RMB9,737, a 71.4% increase from the previous year. Such initiatives reflect our expertise in precisely and effectively leveraging our funding sources to better meet the financing needs of borrowers on our platform. This expertise is particularly valuable during industry-wide fluctuations in risk levels. To prepare for current and future risk challenges, we have refined our borrower segmentation. As our business has scaled, our borrower base has consistently demonstrated healthy and sustainable characteristics. Moving forward into 2023, we will continue to refine our borrower segmentation and adjust our borrower acquisition strategies based on market conditions. In the long term, we anticipate that new borrowers will make up 20% to 30% of our borrower base, allowing us to maintain stability and sustainability. As a result of these efforts, we established a solid foundation to achieve expected growth in 2022. In particular, our efforts in fine-tuning our operations have resulted in increased efficiency in funding allocation and consistent improvements in our revenue scale. In 2022, our loan origination volume, net revenue, and net income increased by approximately 153%, 84%, and 152% respectively. During the year, this exceptional growth demonstrated our solid progress in expanding funding sources, improving asset quality, enhancing risk management capabilities, and refining our operations. On the funding front, the overall supply of funding in the market remains sufficient during 2022, and the funding cost has declined as well. As such, our credit costs are stabilizing while our business scale keeps expanding. Since we have already acquired relatively sufficient funding sources, we continue to expand and deepen our core operation with key funding partners to effectively leverage them to fulfill the credit needs for high-quality borrowers on our platform. As of December 31, 2022, we have partnered with 53 financial institutions, and we were currently in discussions with another 62. Notably, the funding sources without original limitations still contributed to the majority of our total loan origination volume in the fourth quarter. Moreover, we are empowering our partner financial institutions through our technology-enabled services to develop their own self-operated business models. As of 2022, we have already empowered five financial institutions to digitize their own online business, and we are now interfacing with another two financial institutions and actively negotiating with six more institutions to explore potential collaborations. As the COVID control measures are towards the end of the year, we will be able to further expand our business and improve our efficiency in engaging with new funding partners or implementing new partnership models. In late 2022, the whole industry experienced significant risk volatility, which affected our risk metrics to a certain extent. However, I am pleased to report that our risk profiles have already stabilized as our 61- to 90-day delinquency rate has remained stable as of December 31, 2022. The application of AI technology in fintech has been instrumental in quickly addressing challenges posed by market volatility. Going forward, we plan to continue our investments in fintech AI applications to further strengthen our risk management capabilities. Specifically, we will leverage voice and semantic regulation, user identification, asset quality control, and anti-fraud AI modules to enhance our efficiency and risk management while improving users’ experience. In addition to facilitating consumer loans for individuals, we also continue to expand the scale of our services for small and micro business owners. We all know that the COVID-19 pandemic has a severe impact on businesses around the world, particularly small and micro businesses. In response, the People’s Bank of China and other government agencies issued a number of policies calling for financial institutions to increase support for small businesses facing difficulties in production and operations. Our extensive experience in fintech services and business operations enabled us to collaborate with financial institution partners to better serve micro and small business owners. As such, we actively responded to this call and expanded our specialized loan program to help small business owners overcome financial challenges. Throughout 2022, we saw a steady increase in the score and proportion of loan facilitation volume from small and micro business owners. Looking ahead, we remain fully committed to providing financial support and helping these businesses thrive in the face of challenges, ultimately creating value for our borrowers and society. Moreover, we also made excellent progress in our global expansion efforts. In Indonesia, we have continued our former investment and closely monitor the region’s growth potential. In Nigeria, we have achieved significant business and revenue growth by boosting our loan origination capabilities in the local market. Our revenue growth in Nigeria was substantially faster in this quarter year-over-year. We are pleased to note that our successful business operations and risk management capabilities have been replicated and validated on a global scale, enabling us to mitigate potential uncertainties in any local markets as we expand internationally. Moving forward, we remain focused on enhancing the profitability of our overseas operations by developing innovative partnership models and accelerating our product development and penetration in local markets. By tapping into diverse business opportunities in these regions, we expect our global operations to become a meaningful driver of sustainable growth for our company in the long term. Last but not least, I’m glad to report on our recent strides in corporate social responsibility. Our commitment to empowering others through technology-driven financial inclusion is at the core of our philosophy. In August 2022, we published our first environmental, social, and governance report, which set the tone for incorporating social responsibility into our business operations. Throughout 2022, we demonstrated our commitment to making a positive impact on society through various initiatives. In September, for example, we partnered with the Shanghai Soong Ching Ling Foundation to launch the last Children Smile youth mental healthcare program. This program, in addition to our ongoing charity education campaign, aims to provide comprehensive support to underprivileged children focusing on both their physical and mental well-being. Later in December, we worked with local governments in a province to provide mental healthcare training to teachers and students. Additionally, we donated school supplies to the central primary school in the town of Shuitong in Guizhou province, including computers, books, and school uniforms to ensure that left-behind children have access to better educational resources. We also invited psychology experts to conduct mental health training for all teachers in Shuitong, enabling them to better address the psychological needs of their students while fulfilling their educational responsibilities. Our strong commitment to ESG principles highlighted our promise to make a positive impact on society, and we look forward to continuing our efforts in this area. To conclude, we have achieved robust growth as we expected in 2022 as a result of our efforts in strengthening our partnership network, improving our risk management strategies, evaluating our technology capabilities, and expediting our global business expansion. Looking ahead, we remain resolute in our pursuit of sustainable growth and margin expansion. As the regulatory environment stabilizes and the COVID pandemic becomes a thing of the past, we are confident that our proven strategies will continue to drive our success in the years to come. In line with this expectation, we are pleased to forecast that our loan facilitation volume for the full year of 2023 will be around RMB70 billion, with RMB19 billion from the first quarter of 2023. Based on this strong operational outlook and our robust capital position, our Board of Directors has authorized and declared our first-ever dividend policy. We expect to pay dividends twice a year in cash, subject to certain conditions. The annual total dividend distribution shall be no less than 15% of our net income after tax in the previous fiscal year. This declaration underscores our commitment to creating value for our shareholders and our confidence in the long-term growth prospects of Jiayin Group. With that, I will now turn the call over to our CFO, Mr. Fan Chunlin, please go ahead.

Fan Chunlin, CFO

Thank you, Mr. Yan, and hello, everyone, for joining our call today. I will now review our financial highlights for this quarter. Please note that all numbers will be in RMB, and percentage changes refer to year-over-year comparisons unless otherwise noted. As Mr. Yan mentioned, we delivered record growth in 2022, particularly in the fourth quarter. Our loan origination volume grew by 249.2% to RMB18.9 billion as we refined our partnership operations and improved our funding efficiency. Our net revenue was RMB1.1 billion, up 186.4%, driven by a 149.2% increase in our revenue from our loan facilitation services. Other revenue grew significantly to RMB154.7 million from RMB7.1 million in the same period last year, mainly driven by incremental revenues from individual investor referral services and post-facilitation services. Moving on to costs. Origination and servicing expenses were RMB195.1 million, up 130.1%, in line with our loan origination volume growth. Allowance for uncollectible receivables, contract assets, loans receivable, and others reduced by 12.2% to RMB15.1 million, compared to RMB17.2 million in the same period last year. Sales and marketing expenses increased by 138.4% to RMB374 million, mainly reflecting higher borrower acquisition expenses. As a percentage of net revenue, sales and marketing expenses decreased to 35.5% from 42.6% in the same period last year. General and administrative expenses were RMB59.3 million, up 26.7%, primarily driven by an increase in staff costs in the quarter. As a percentage of net revenue, G&A expenses reduced to 5.6% from 12.7% in the same period last year. Research and development expenses were RMB64.4 million compared to RMB46.6 million in the same period last year. We recorded higher employee compensation and benefits as well as increased fees for professional services in the quarter. As we prudently managed our expenses and grew our revenues at a much faster pace, we were able to further expand our property sale in the fourth quarter. Our net income for the fourth quarter increased to RMB533.7 million from RMB122.5 million in the same period last year. Our basic and diluted net income per share was RMB2.09 compared to RMB0.57 in the same period last year. Basic and diluted net income per ADS was RMB9.97. We ended this quarter with RMB291 million in cash and cash equivalents, up from RMB217.5 million as of September 30, 2022. As of December 31, 2022, we have repurchased approximately RMB1.5 million of our ADS for $3.5 million and our $10 million share repurchase plan we announced in June 2022. Before I wrap up, I will briefly review our full-year financial highlights as well. In 2022, our loan volume grew by 153.4% to RMB55.5 billion, while our net revenue increased by 83.7% to RMB3.3 billion. Net income grew by 152.3% to RMB1.2 billion, while the net margin expanded to 36.1%. Net income per ordinary share and per ADS were RMB5.48 and RMB21.92 respectively. With that, we can open the call for questions. Ms. Xu, our Chief Risk Officer, and I will answer questions. Operator, please proceed.

Operator, Operator

Thank you. Our first question comes from the line of Ling Yao from Sunu Securities. Please go ahead. Your line is open.

Unidentified Analyst, Analyst

And I will do the translation for myself. I’m Ling Yao from Sunu Securities. My first question is about your average dividend policy. Since you are buying back shares and paying dividends, does that mean you don’t need that much cash? Would you be better off investing the cash to expand your borrower base and funding partnership network for stronger growth? Thank you.

Yan Dinggui, CEO

My first question is about your average dividend policy. Since you are buying back shares and paying dividends, does that mean you don’t need that much cash? Would you be better off investing the cash to expand your borrower base and funding partnership network for stronger growth? Thank you.

Shawn Zhang, Investor Relations

Okay. This is Shawn Zhang from the Investor Relations and I will do the corresponding translation in English. So thank you, Ling Yao, for your question. It is true that the company’s current condition of operation is sound and stable. You can see that our performance shows a very fast growth this year. Our operational and financial indicators are significantly improved, and also, the company’s operational cash flow is robust, and our balance sheet is pretty strong. But at the same time, you can see that the PE ratio of our company is still very low, which is below 2x. The management believes that the current price of our company’s ADS fails to reflect our inherent value, or you may say that we are actually undervalued. In June 2022, the Board approved the $10 million repurchase plan. In addition to that, our Board just approved our dividend policy in order to further protect the interests of our investors.

Yan Dinggui, CEO

Our balance sheet is strong, and our PE ratio remains low at below 2x. Management believes that the current price of our ADS does not accurately reflect our true value, indicating we are undervalued. In June 2022, the Board approved a $10 million repurchase plan, and they have also recently approved a dividend policy to further safeguard the interests of our investors.

Shawn Zhang, Investor Relations

Okay. So Mr. Yan just gave our yearly loan facilitation volume guidance for 2023 at a level of RMB70 billion, which makes it clear that the company will keep sustainable growth in the long run, and the management is very confident about that. Thank you.

Yan Dinggui, CEO

In 2022, the Board approved the $10 million repurchase plan. In addition to that, our Board just approved our dividend policy to further protect the interests of our investors. Mr. Yan just provided our yearly loan facilitation volume guidance for 2023 at a level of RMB70 billion, which indicates that the company will maintain sustainable growth in the long run, and the management is very confident about that. Thank you.

Shawn Zhang, Investor Relations

Okay. I will do the translation for Mr. Yan. So Mr. Yan just gave out two reasons. The first reason is that we will definitely keep investing in new borrower acquisition – but we do have a plan for that. We all know that new borrowers, if you compare them with the repeat borrowers, usually come with more uncertainties. We really need to avoid some risks during this process. The second reason will be that we didn’t really meet our goal for 2023 based on our goal for 2022. And we can see that this goal was made very carefully. So the main reason is that we need to keep the asset quality at a very healthy level and to avoid potential risks.

Unidentified Analyst, Analyst

Sorry about that. Yes, sure. The translation for my question is, my second question is about the robust market demand throughout 2022 that the CEO just mentioned. Are you expecting that to change in 2023? The outlook only reflects 36% loan facilitation volume growth in 2023 compared to your 153% loan facilitation volume growth in 2022. Why are you forecasting such a deceleration in the growth? Thanks.

Shawn Zhang, Investor Relations

Thank you for the translation. Yes.

Xu Yifang, Chief Risk Officer

Mr. Yao. This is Yifang Xu. I will just add a little bit on your question to the answer to your question in addition to what Mr. Yan has provided so far. On your first part of your question, you asked about the overall outlook. As just Mr. Yan has mentioned in his opening remarks, there are several factors pointing us towards a positive and healthy expectation throughout 2023. These factors include positive developments on the regulatory front, as well as the official endorsement towards partnerships between Internet platforms like us and financial institutions. This improvement warrants financial institutions to pursue further interest or deepen their partnerships with us, therefore guaranteeing our healthy funding sources going into 2023 and forward. Similarly, on the consumer demand side, we are seeing growth in consumer loans nationwide, as well as request and standing resource supplies from the partners and institutions we are already collaborating with. In addition to that, you’ve asked about our adjusted percentage growth rate in 2023. But let’s first go back to looking at the absolute numbers. In 2021, overall transactions were around RMB22 billion. In 2022, this number we just reported is RMB55.5 billion. So, with a little over RMB30 billion growth, Jiayin has been in this market for over 10 years. We have harvested low-hanging fruits in 2022 by focusing on our repeat borrowers. We are focused on exploring and maximizing their potential borrowing needs by matching them with competitive products offered through our platforms in partnership with our financial institutions. Going into the fourth quarter of 2022, we have changed gears into a focus on more organic growth. As you probably have noticed, in Q4 2022, our total transaction was around RMB18 billion, and our outlook for Q1 2023 is slightly improved to RMB19 billion. So, we are focusing on organic growth at this point by introducing higher quality credit risk customers through more competitive acquisition channels and bundling those with more competitive product offerings to help grow our overall customer portfolios while maintaining healthy risk metrics. Thus, looking at our growth in '23 outlook, we're predicting an increase from RMB55 billion to RMB70 billion. As you can also notice that RMB70 billion is relatively conservative when considering the seasonal changes and slight uncertainties in the second half of 2023 regarding the overall landscape in this industry. We are confident in developing these numbers, but we also have flexibility to adjust the outlook upwards when we feel comfortable to do so. Hope we answered your question, Mr. Yao.

Unidentified Analyst, Analyst

Okay. Thank you.

Shawn Zhang, Investor Relations

Okay. So operator, I think we can move to the next participant who wants to ask a question.

Operator, Operator

Thank you. One moment please. Your next question comes from the line of Sam Lee, who is an individual investor.

Sam Lee, Individual Investor

I will translate for myself as well. Thank you for taking my questions. My first question is that you have recorded a higher net margin in Q4 compared to some of your peers. Would you like to share some possible reasons for that? Thank you.

Fan Chunlin, CFO

Thank you for taking my questions. My first question is that you have recorded a higher net margin in Q4 compared to some of your peers. Would you like to share some possible reasons for that? Thank you.

Shawn Zhang, Investor Relations

Okay. So, this is Shawn Zhang, and I will do the translation in English. Thank you, Sam, for your question. From the perspective of our performance and financial indicators, Q4 was an excellent quarter with very strong profitability. It is true that if you are looking into the margin, it is probably slightly higher than our peers. So, in Q4, our operating margin reached nearly 33%, and for the full year of 2021, it is about 36.1%. I believe there are two reasons for that. The first reason is the scale effect generated by our rapid growth in performance. The second reason is probably our stable fixed costs, and our funding costs are stable as well, and at the same time, that is declining. Consequently, our refining operation also contributed to the improvement.

Fan Chunlin, CFO

In the fourth quarter, our operating margin was nearly 33%, and for the entire year of 2021, it was around 36.1%. I believe there are two main reasons for this. First, we have benefited from economies of scale due to our rapid growth. Second, our fixed costs are stable, and our funding costs are also stable and declining. As a result, our refining operations have also contributed to this improvement.

Shawn Zhang, Investor Relations

Okay. So, the net margin is slightly higher, indeed. Our net margin for Q4 reached more than 50%, which was higher than the operational margin, mainly due to the impact of some extraordinary reasons. For example, some of our core business entities just obtained the qualification of high-tech enterprises, which benefitted us by adjusting our applicable income tax rate to 15%, which can be traced back to 2021. That will be one reason for that.

Fan Chunlin, CFO

The net margin is slightly higher. Our net margin for Q4 exceeded 50%, which surpassed the operational margin, largely due to some extraordinary factors. For instance, several of our core business entities recently qualified as high-tech enterprises, allowing us to adjust our applicable income tax rate to 15%, which dates back to 2021. That is one reason for the increase.

Sam Lee, Individual Investor

My second question is about the vintage curves. While the loan volume accelerated and grew significantly, you have managed to keep your risk performance at an industry-leading level. If your loan growth decelerates as you have forecasted, can we expect your vintage rates to improve even further in 2023? Thank you.

Xu Yifang, Chief Risk Officer

This is Yifang Xu. I am going to take on your questions. First of all, I will answer your question in English and then will translate myself into Chinese. First of all, I want to continue focusing on improving our risk metrics throughout 2022 and forward, just as ESG and as a company focusing on the lending business, having good control over our risk metrics and practicing prudent risk management philosophy is intrinsic within our company’s philosophy and policy. However, I will not connect the growth rate and the loss rate in the way you presented. Even as we are shifting from a growth rate of three digits to a double-digit rate in 2023, we are still expecting significant growth from RMB55 billion to over RMB70 billion. As we continue to grow our platform by nearly RMB20 billion throughout 2023, our chief focus of the risk path will be primarily focused on two fronts: one from new customer acquisitions, where we will continue to practice constraint on acquiring new customers; and the second focus will be choosing the right acquisitions channels and the right product offerings, both of which are aimed primarily at improving our customers' credit risk profiles. Going forward, as we have started to focus on improving our customers' credit risk profiles for over a year now, we will continue to do so by choosing acquisition channels that give us broader and greater access to higher-quality customers. Similarly, in our product offerings, we are matching loan interest rates from our financial institution partners with lower-interest rate products to attract the right customer segments to our platforms. This is on the new customer acquisition side, and how we are going to drive the RMB20 billion overall growth while continuing to improve upon our industry rates. On the repeated customer borrowers, our focus will be on enhancing customer-level risk modeling and decision-making in addition to what you typically see on the loan-level risk decision models. This allows us to focus on high-value customers, ensuring that we expand our credits to them without overextending our risk appetite. In addition to this modeling focus, we will also explore external third-party data along with our internal customer behavioral data; a more complex data mining on customer-level data will allow us to improve models throughout the entire lifecycle of our customers. Now I am going to summarize my answers in Chinese. Hope this answers your questions.

Sam Lee, Individual Investor

Thank you. No more questions from me.

Operator, Operator

Thank you. We have reached the end of the call. I will return the call back to Shawn for closing remarks. Please go ahead.

Shawn Zhang, Investor Relations

Thank you, operator, and thank you all for participating in 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.

Operator, Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.