LexinFintech Holdings Ltd. Q2 FY2023 Earnings Call

Hello, and welcome to the LexinFintech's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. It is now my pleasure to introduce IR Director, Mandy Dong.

Thank you. Hello everyone. Welcome to Lexin second quarter 2023 earnings conference call. Our results were issued earlier today, and it can be found on our IR website. Joining me today are our CEO, Jay Xiao; President, Jared Wu; and CFO, James Zheng. Before we get started, I'd like to remind you of our Safe Harbor statement and our earnings press release, which also applies to this call. During the call we may refer to business outlook and the forward-looking statements, which are based on our current plans, estimates, and projections. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Unless otherwise stated, all figures mentioned are in RMB. Jay will first provide an update on our overall performance. James will cover the financial results in more detail. And lastly, Jared will then discuss risk management. I will now turn the call over to Jay. His remarks will be in Chinese. And the English translation will follow.

Hello, everyone. I'm pleased to share our performance for the second quarter of 2023. In the current macroeconomic environment, we achieved another strong quarterly result by taking a cautious business approach. In the second quarter, loan volumes reached RMB63.9 billion, a 30% increase compared to the same period last year, again surpassing the high end of our guidance. Our loan balance rose to RMB114.1 billion, up 32% year-over-year. Revenue was RMB3.1 billion, reflecting a 27% increase year-over-year. Net profit reached RMB356 million, which is a 112% increase year-over-year. In this quarter, we focused on risk management and data, advancing more refined operations, continuously enhancing our user risk identification systems, and improving asset quality. Our e-commerce business grew rapidly, and the synergies with our main consumer finance business strengthened further. We have experienced solid business growth for five consecutive quarters, with significant improvements in profitability and cash flow. We have also prioritized compliance capabilities and successfully completed our credit reform in accordance with the June 30 compliance requirements. There were three key highlights in our second quarter results. First, we optimized our operations to enhance our asset structure and increase the share of high-quality customer segments. During the second quarter, we refined our models to boost our risk identification capabilities and improve user identification accuracy. Existing customer operations benefited from better capabilities, resulting in higher marketing efficiency in the second quarter, which increased by 16% while telemarketing costs decreased by 39% sequentially. The order rate of re-approved users rose from 40% to 90%, and the day-one delinquency rate dropped by 20%, reflecting our operational improvements. The number of new active users grew by 14.9% in the second quarter compared to the first quarter, while customer acquisition costs remained stable. Additionally, our asset quality steadily improved as well. The proportion of new loans from high-quality users increased to 92% from 80% in the same period last year, with the day-one delinquency rate falling nearly 10% quarter-over-quarter. While existing loan asset quality did fluctuate slightly due to specific industry conditions and the macro environment, we are confident that overall asset quality will continue to enhance as we onboard more high-quality users. Secondly, our e-commerce business experienced rapid growth, enhancing synergies among various business segments within our Lexin consumption ecosystem. For the second quarter, the e-commerce business achieved a transaction volume of RMB1.49 billion, up 31.6% quarter-on-quarter and 34.5% year-over-year, outpacing the 10.7% year-over-year growth of total retail sales of consumer goods. During the June 18 Shopping Festival, the e-commerce segment saw a 44% year-over-year growth in transaction volume. User numbers surged, with active e-commerce users increasing by 24.2% quarter-over-quarter and 36.4% year-over-year. We have targeted high-quality, high-growth young consumer groups interested in trendy goods and have introduced quality merchants in fashion, sports, and luxury brands, which align well with installment consumption preferences. The enhancements made to our e-commerce platform attracted many existing users, creating synergies with our consumer finance businesses. The significant increase in e-commerce consumer traffic during the shopping festival contributed to a 4% rise in active users within our consumer finance segment from April to June. This, in turn, encouraged further e-commerce consumption, creating a mutually beneficial loop in our business ecosystem. In July, we were honored to receive an award for the best digital customer ecosystem initiative in China from Asian Banker. Thirdly, we have consistently delivered five consecutive quarters of robust business growth and strong cash flow. In the second quarter, our net margin increased to 11.6%, a 4.7 percentage point rise year-over-year. Cash flow remained strong, increasing by 30.2% compared to the end of fiscal year 2022. We have continued to pursue our dual strategy focused on risk management and data, which has been fundamental to our business turnaround since its lowest point in Q2 of 2022. The second quarter of 2023 is our fifth consecutive quarter of growth, and we expect this positive momentum to persist. To reflect this performance, our Board has approved and decided to distribute a recurring cash dividend, aiming to enhance returns for our shareholders and convey our confidence in business prospects. Starting in the second fiscal quarter of 2023, we will distribute a semi-annual cash dividend, amounting to approximately 15% to 30% of the company's net profit from the previous six months or as authorized by the Board. In Q3, we will distribute a dividend of $0.058 per ordinary share or $0.116 per ADS for the six-month period ending June 30, 2023, representing around 20% of net profit for the first half of 2023. Our ongoing commitment to a dual strategy has facilitated steady business growth. In terms of technology investment, in Q2, our research and development expenses reached RMB120 million, keeping us at an industry-leading level. Notably, we accelerated the utilization of AI large language models in our financial operations. This model has been integrated into our technology for tele-sales, smart customer service, and operations oversight. This implementation has resulted in enhanced operational efficiency and improved user experiences. For instance, the percentage of customer service cases solved without human intervention rose to 91.5%, an 8.2% increase year-over-year. In our smart assistant services, new tools and design initiatives from the previous quarter were effectively applied to data analysis, optimizing our risk management database, increasing analysis efficiency, and reducing workload for employees. Lastly, I'd like to update you on our social responsibility efforts. Since we launched our small store support project aimed at assisting the financing needs of SMEs, we have helped over 100,000 SME owners across more than 300 cities in 30 provinces. Additionally, we have collaborated with regulators, law enforcement, legal professionals, industry groups, and financial institutions on customer protection initiatives. Our data security capabilities have also received recognition from national-level institutions such as The China Academy of Information and Communication Technology and The China Cyber Security Industry Alliance. Looking ahead, despite the challenges and uncertainties in the macro environment, we will maintain a cautious business approach, persistently advance our risk management strategies, and upgrade our customer base to achieve higher quality growth.

Thank you, Jay. I'll now provide more details on our financial results. Please note that all numbers are in RMB unless otherwise stated. The second quarter marked our fifth consecutive quarter of rebound since we bottomed out from the trough in Q1 of last year. We delivered another quarter of healthy growth both in overall operating and financial numbers. This is not an easy achievement amidst the relatively mild consumption recovery in the second quarter. Thanks to our continuous efforts in reconstructing risk management capabilities, upgrading to a better customer base, refining operations, and cost optimization initiatives, we believe we have planted the right seeds by undertaking the above-mentioned strategies and expect to reap more benefits of such improvements in the coming quarters. First, please let me elaborate at a high level on what happened in this quarter compared with the same quarter of 2022. Total loan originations for the quarter reached RMB63.9 billion, an increase of 30.1% year-over-year, beating the high end of Q2 guidance we provided earlier. Revenue grew by 26.6% year-over-year to reach around RMB3.1 billion for the quarter, mainly driven by GMV growth and the increased loan balance, which reached RMB114 billion. As a result of our customer base upgrade, better quality customers usually generate larger ticket size loans, hence contributing to the GMV growth. The strong revenue growth was achieved despite the fact that the weighted average APR fell below 24% in Q2, around 1 percentage point lower than a year ago. Loans with APR under 24% now made up over 86% of all loans, more than 5% higher than one year ago. Another contributing factor was the funding cost, which stood at 6.6% during this quarter, a decrease from 7.2% a year ago as our collaboration with new funding partner banks continues to roll out. We expect lower funding costs in the coming quarters. In addition, the loan tenure was 14.7 months compared to 12.8 months in Q2 last year, also contributing to the revenue growth. However, amidst the increased macro uncertainties, we have started to optimize the tenure structure earlier this year to reduce potential exposures. We continue to sharpen our focus on iterating and refining risk management capabilities in the second quarter, upholding risk management as our top business priority. Asset quality steadily trended better. For instance, the day-one delinquency rate reduced. We also further improved the accuracy of credit profiling and risk management efficiency. Due to the short-term turmoil in the post-loan collection industry caused by a specific company incident, our 30-day plus delinquency rate and a 90-day plus delinquency rate fluctuated a bit, but still better than one year ago, standing at 2.59% and 4.61%, respectively, versus 2.63% and 4.85%. In Q2, as we pushed ahead cost efficiency initiatives, total operating-related costs and expenses, including processing and servicing costs, sales, marketing, R&D, and G&A as a percentage of average loan balance dropped notably to 1.01% compared to 1.43% in Q2 of last year, indicating a 42 basis point cost reduction. Moving forward, we are fully committed to continue cost optimization initiatives as one of our long-term strategies. As a result of the aforementioned, we are pleased to report a net income of RMB356 million, an increase of 112% year-over-year. The net margin improved to 11.6% compared to 6.9% in Q2 last year. We have seen substantial improvements in operational efficiency and profitability compared to one year ago, which clearly serves as a strong testament to our ability to sustain the V-shaped rebound. Apart from the above year-over-year analysis, I would also like to share some perspectives from our quarterly comparisons. In Q2, total loan origination was RMB63.9 billion, an increase of 4.9% quarter-over-quarter as we maintained a prudent growth approach considering wary consumer spending. It's worth mentioning that we fully leveraged our lurching consumption ecosystem and well-captured the growth opportunity during the June 18 shopping festival. As a result, we were able to deliver a faster than expected 31.6% quarter-over-quarter GMV growth on the e-commerce platform. We also expanded product offerings and introduced more high-margin SKUs to boost the gross profit of our e-commerce business line. Consumer finance take rate fell slightly to 2.3% from 2.5% of the last quarter. The slight fluctuation in take rate is due to the lowered APR, which stood at 23.6% compared to 24.4% in Q1 and more bookings of provisions due to overall market uncertainty and shortened tenure. The tenure is now at 14.7 months versus 15.1 months of the previous quarter. Consequently, total operating revenue for Q2 recorded a 2.4% quarter-over-quarter increase, with revenue from tech empowerment service registering a 6.5% increase quarter-over-quarter and revenue from the installment e-commerce recording an increase of 5.5% quarter-over-quarter. E-commerce revenue growth was lower than GMV growth due to the increased platform service business instead of the company directly sourcing and selling the merchandise, therefore more revenue is booked on a net basis. Overall operating expenses stayed almost flat despite a 3% growth in sales and marketing-related costs driven by user growth. Offsetting the sales and marketing cost increase was a decrease in G&A and R&D expenses due to efficiencies. Therefore, we achieved a sequential growth in net income of 8.6% and further enhanced the net margin to 11.6% from 11% in the last quarter. To conclude, we have registered a strong improvement during the second quarter from both year-over-year and quarter-over-quarter perspectives. This solid result was achieved under the current macro uncertainties and slowing economic recoveries. At the end of the second quarter, the company had a cash position of around RMB5.5 billion on hand and a net equity position of RMB9.4 billion. In view of the healthy cash flow situation, the board approved the semiannual dividend plan. The cash flow from operations is improving and remains robust to sustain future growth, thanks to increasing profitability and more efficient guaranteed deposit requirements for the loan facilitation business. This also demonstrates our confidence in the overall business to continuously produce shareholder returns. Finally, I would like to update our outlook for the second half of 2023. Based on the company's preliminary assessment of current market conditions and the macro situation, we reaffirm the earlier guidance of an annual GMV amount of RMB245 billion to RMB255 billion, representing a 20% to 25% year-over-year growth. Therefore, for the second half of the year, we expect high single-digit to mid-teens percentage growth year-over-year. These estimates reflect the company's current expectations, which are subject to change. In summary, strong second quarter results represented the fifth consecutive quarter of continued rebounding in both operating metrics and financials. It further solidifies our commitment to continue the turnaround journey despite possible headwinds from macro uncertainties.

For the second half of the year, we anticipate growth in the high single-digit to mid-teens percentage range compared to the previous year. These projections are based on the company's current expectations and may change. In summary, our solid results for the second quarter mark the fifth consecutive quarter of recovery in both operational metrics and financial performance. This reinforces our dedication to the turnaround process, even in light of potential challenges from macroeconomic uncertainties.

Thank you, Management, for allowing me to ask questions. I have two inquiries. The first pertains to the outlook for various operating metrics in the third quarter and the second half of the year. How is credit demand in July and August considering the macroeconomic challenges? My second question is about asset quality. As previously noted, changes in the loan collection industry have led to some fluctuations in asset quality. What has been the impact so far, and could Management provide additional updates on the future outlook for asset quality? Thank you very much.

The first question is about the outlook for various operating metrics in the third quarter and the second half of the year, specifically regarding credit demand in July and August in light of macroeconomic challenges. The second question relates to asset quality, noting that recent changes in the loan collection industry have caused some variations. What has been the impact to date, and can Management provide further updates on the future outlook for asset quality? Thank you.

I’d like to add a little more. In light of the uncertainties in the macro situation, we will maintain our original guidance from the beginning of the year for GMV growth of RMB245 billion to RMB255 billion. This translates to a year-over-year growth of 20% to 25%. In fact, having completed the first half of the year, we have achieved a year-over-year growth of 35% so far. This suggests that for the second half of the year, we anticipate a GMV growth in the high single digits to possibly mid-teens, as we are taking a cautious approach to business growth. Our focus is on stabilizing our overall scale and GMV growth while prioritizing risk management and net income in our operations for the second half.

Okay, I'll translate for Jay regarding the first question. We still expect our full-year guidance to remain between RMB245 billion and RMB255 billion. Currently, the macro recovery isn't as optimistic as we initially hoped for this year. We are deliberately controlling the pace of our growth, and depending on the macro environment, we are adopting a more cautious business strategy. Our focus is primarily on profitability. In the second half, the pace of our business growth will largely depend on the recovery of the macro environment. From an operational standpoint, demand growth in July and August has been fairly similar to that in the second quarter, and we do not see a strong recovery trend. Therefore, during the third quarter, we will concentrate on reasonable growth while continuing to prioritize profitability, aiming for stability. Regarding your second question, as I previously mentioned, with the macro economy expected to decline slightly, there is some pressure on our asset quality. In the second quarter, we faced impacts due to certain collection issues affecting specific companies, which burdened us. This has impacted our collection rates, but we are working hard to enhance the quality of our new assets. Overall, the quality of our new assets is improving, which reflects lower collection rates, balancing the overall data. Looking ahead, even with the macro environment not recovering as we had anticipated, we will encounter challenges to our risk level. Nonetheless, we are confident that as we continue to acquire more high-quality new assets, our overall asset quality will improve.

My first question is about the e-commerce business line. Management has mentioned that this area needs to grow quickly in Q2. Can you provide more details on the factors driving this growth and your plans for the future? Additionally, there was a mention of the e-commerce business line being part of the Lexin ecosystem. Could you give some updates on Lexin's consumption ecosystem as a whole? Thank you.

We have been concentrating on attracting potential high-quality users. In the past quarter, we expanded our categories and introduced high-quality merchants, tailoring our offerings to better meet the needs of our target audience. We capitalized on the 618 e-commerce shopping festival by enhancing our operations and promotional efforts, leading to impressive results. A key factor in this success is our strong foundation in consumer insights through the Lexin Group. We have built a consumer ecosystem focused on high-quality, high-potential users, with e-commerce and consumer finance businesses reinforcing one another. Our e-commerce platform supports customer acquisition and re-engages existing customers, creating a synergy between our platforms. Lexin originated from the installment e-commerce sector, gradually establishing a comprehensive consumer ecosystem that includes consumer finance as a primary focus, along with installment e-commerce, offline customer acquisition finance, SaaS services for financial institutions, and other innovative business lines, all forming a full ecosystem for delivering credit services. With our e-commerce progress in the second quarter, our SaaS for financial institutions and offline operations are advancing as planned. We anticipate sharing more substantial and scalable results in the future. Hope that addresses your question, Alex?

Hello, management. Thank you for taking my question. Can you provide more details on the reasons for improving the dividend policy in the current context? Are there any potential effects on the company's cash flow? That's all. Thank you.

Okay, I'll tackle this question. In view of the macroeconomic uncertainties, we are maintaining a very prudent approach to business growth. We are focusing on stabilizing the overall scale while prioritizing risk management and profit. Concentrating on risk management and profit will generate more profit. We continue to observe growth in profit activities. Additionally, we are committed to cost optimization initiatives as one of our long-term strategies. This will also lead to higher profitability in the future. The cash flow from operations is sufficient and robust to support future business expansion. As we announced earlier this year, we also restructured our original convertible bond with PAG; the payment to PAG is not an issue for us anymore. In fact, we have paid half of the original convertible bond amount. So, we feel that a dividend is a more direct and tangible way to reward shareholders at this time. This underscores the overall management's confidence in the operations of the business. Hopefully, this answers your question, Yada.

Okay. Thank you, everyone, again for joining us today. If you have further questions, please contact us via our contact information available on our IR website. Thank you, everyone.

Bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.