Earnings Call Transcript - QFIN Q4 2020

Mandy Dole, IR Director

Thank you. Hello everyone and welcome to our Fourth Quarter and full year 2020 Earnings Conference Call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Xu, our CFO and Director; and Mr. Zheng Yan, our CRO.

Haisheng Wu, CEO

Thank you, Mandy. Hello everyone. I am very pleased to report another exciting quarter with growth over the year with another set of record-breaking results and continued growth momentum since 2020 Q4. For Q4, total loan facilitation was RMB69 billion, up 29% year-over-year. Outstanding loan balance increased by 27% year-over-year to RMB92.1 billion. Total revenue was RMB3.34 billion, up 39% year-over-year. Non-GAAP net income was RMB1.31 billion, up 155% year-over-year. For the full year, total loan facilitation was RMB246.8 billion, exceeding the upper end of our guidance range, which was RMB242 billion to 244 billion by RMB2.8 billion. Total revenue was RMB13.6 billion, up 47% year-over-year. Non-GAAP net income was RMB12.8 billion, up 38% year-over-year. We delivered outstanding results despite a challenging year hurt by the COVID-19 pandemic. This is an important testament to the resilience of our risk management system and the efficiency of our overall operations. We are more confident than ever that we will be able to maintain sustainable and solid growth. Meanwhile, these results are a testament of our strategy, and we plan to diversify our customer base and resilient channels. We are expecting accelerating growth in 2021. While exceeding strong growth in key operational and financial metrics, the quality of earnings in our overall business also improved meaningfully. Capital-Light and other cap solutions and new milestones contributed 34.1% of total loans facilitation in Q4. Recently, the fixed ratio reached over 50% on a monthly basis. Moreover, the quality improvement of our earnings indicates that we have succeeded in our milestone phase of capital-driven strategy upgrade.

Alex Xu, CFO

Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our quarterly earnings call. So in the interest of time, I will not go over all the financial line items on the call. Please refer to our earnings release for the details. Strong business momentum continued in Q4 and into the New Year, as consumer confidence and economic activities remain on a steady upward trend. We have experienced robust consumer demand for credit, along with a further improvement in asset quality. Total net revenue for Q4 was RMB3.34 billion versus RMB3.7 billion in Q3 and RMB2.4 billion a year ago. Revenue for credit-driven services, capital-heavy, was RMB2.56 billion, compared to RMB2.96 billion in Q3. The sequential decline was in part due to facilitation volume mix change, as capital-light contribution increased significantly. This decline in take rate was attributed to lowering our average interest rate in Q4 to 25.3% from 25.9% in Q3, following the Supreme Court ruling in late August. However, we expect interest rates to gradually recover somewhat throughout 2021 as the 4xLPR rate cap is no longer applicable to institutional lending according to the Supreme Court's latest judicial interpretation. Revenue from credit-driven services was also negatively impacted by a one-off reassessment of early repayment discounts. Revenue from platform services, capital-light, was RMB782 million compared to RMB748 million in Q3. If you recall, in Q3, there was a RMB150 million one-time reversal of previous charges related to certain loans, risk performance versus performance benchmarks, set by the revenue-sharing agreement between us and our partners. Aside from this reversal charge in Q3, for an apple-to-apple comparison, the sequential growth of platform service revenue in Q4 was approximately 33%. The growth was mainly due to higher volume under the capital-light model, as well as better contributions from the ICE model, and the underlying take rate for the platform service also improved in Q4. For the full year 2020, platform service revenue grew about 80% as capital-light percentage contribution to total volume nearly doubled.

Jacky Zuo, Analyst

So let me translate my questions. So, congrats on the strong results. I have three questions to ask. Number one is about our loan guidance. So we gave very strong full-year guidance, just want to try to understand the rationale behind the guidance. Do we expect a larger budget for sales and marketing? How much contribution was from the SME lending and what is the run rate for the first quarter so far? And the second question is about the customer acquisition channels. Trying to understand in terms of the channels, how much will be from the cooperation with leading internet platforms, as well as the offline sales and also the traditional online traffic channels? And the third question is about our take rates. I'm surprised the Capital Heavy model take rate was a bit lower in the first quarter. So I saw probably the impact is from lower APR and also late payment impact. I just want to understand the rationale about the lower take rate and what's the outlook for this year 2021? Thank you.

Haisheng Wu, CEO

Thank you, Jacky very much for your question. I will handle the first two questions and our CFO, Alex Xu, will address your third question. For the first question regarding the fundamentals of our loan guidance, we are building this guidance based on our successful growth in the past few years, and considering the macro environments and the industry policy which will affect the overall industry development. That's how we developed our 24% to 36% year loan origination guidance. For the existing customer acquisition channels, we will largely increase our online traffic channels this year while maintaining stable customer acquisition costs. If you compare across the entire market, as some of our peers disclosed their CPS costs, we have a very strong competitive edge in terms of our brand. Second point, as mentioned in my remarks, we will spend more efforts on the embedded finance customer acquisition channel this year. Thanks to our investments last year, we will see rapid growth in this channel this year, with new customers from this channel contributing 30% this year. The third driver for our growth strategy this year is SME loans. There are two components of this growth. The first part is our transition from high-quality individual consumers from our existing customer base. The second part encompasses newly acquired SMEs. In total, these two parts will contribute around 10% of total loan book this year. The fourth growth driver comes from our RM SaaS service products. We are expanding cooperation with KCB to ramp up our smart risk management service to more financial institutions.

Alex Xu, CFO

Okay, thank you Haisheng. I just want to add one small piece regarding customer acquisition costs. Some of our peers disclosed their CPS costs, and we look at the same logic and the methodology to calculate it. We are running roughly 40% below that number, so that's just a small note on customer acquisition costs. In terms of the take rate for Q4, yes, the take rate in Q4, particularly for the capital-heavy side was impacted by two major items. One is really the interest rate cap causing the lower rate, as I mentioned in the prepared remarks, we lowered it to 25.3% versus 25.9% in Q3, which affected the take rate on the capital-heavy side. The second impact is more of a one-off item. A ruling from November 2019 mandated that customers could make early repayments without significant penalties. We started to change our practices in response, but initially, we did not know the full impact of this on our finances. Once we reached Q4, with an average loan term of about nine months, we understood that the actual early repayment discount ratio was higher than our previous estimates. As a result, we had to take a charge to reflect the actual repayment discount ratio, which amounted to between RMB170 million to RMB280 million, making it a one-off hit to the top line. The third overall impact to the top line was really the mix change, meaning the increased contributions from capital-light financing and decreased contributions from capital-heavy financing. For every RMB10 we facilitate under the capital-heavy model, we roughly make about RMB3 in the bottom line. To achieve the same RMB3 in the bottom line, we only need RMB6 in capital-light facilitation. So, if we anticipate around 30% earnings growth for 2021, we only need 10% revenue growth to reach that due to the mix change continuing throughout this year. That's why I encouraged analysts and investors to adjust their financial models to align with this transition toward a more capital-light driven model with relatively slower revenue growth but improving margins. This drives comparable earnings growth versus volume growth.

Jacky Zuo, Analyst

That's very clear. Thank you, Haisheng.

Richard Xu, Analyst

Basically, I have two questions. With the clear clarity on the interest rate environment, I want to know whether the interest rates will rebound, and what would be the proper level for interest rates considering there's still some regulatory guidance? Secondly, on the loan volume growth, what will be the long-term view as there is a regulatory focus on the pace of consumer credit growth? What would be a more sustainable pace for the longer-term? Thank you.

Haisheng Wu, CEO

Thank you, Richard for your question. I will answer your first question. Yes, after the new ruling by the Supreme Court at the end of last year 2020, we have seen a slight rebound in interest rates at the product level. However, considering the overall regulatory environment and our responsibility as a company, we intend to implement a long-term downward trend in prices. This can be seen in several new business initiatives. For example, we are exploring products for better quality prime clients, and we are entering the SME loan business, where both product categories carry lower interest rates compared to our existing products. We take into consideration a comprehensive view when operating our business, focusing not only on pricing but also on the lifetime value of our customers. Our purpose as a loan facilitation platform is to meet the needs of borrowers and financial institutions, covering a broader price range to accommodate various financial demands.

Haitong, Analyst

My question focuses on two things. One is about the potential increase in cash position, especially as we are moving towards a capital-light model. I believe that the demand for restricted cash may likely reduce, and if that's the case with an increasing cash position, what will be our plan in the coming years? Can we expect dividends like our peers? The second question is about our current plans to return to Hong Kong for listing. Thanks.

Haisheng Wu, CEO

I will answer your first question. In terms of cash use, the most important aspect is that we are still aggressively growing our business and will invest in new areas, such as product development and customer acquisition. In the long term, we expect a balanced mix for fintech players, where the majority will come from the capital-light model, with some transitional loan facilitation and self-financed balance loans. There are several reasons to increase our own balance sheet business; it returns a very high return on equity, about 40%. Major equity investments are also a consideration, such as in a rapidly growing internet insurance company with promising prospects. Additionally, we are actively looking for investment targets with great potential synergy. Lastly, cash use may involve capital injection into our micro-lending license or guarantor license, and we may consider repurchasing more licenses.

Alex Xu, CFO

Sure, Haisheng. Basically, Haisheng covered the cash usage throughout this year to support our business growth, getting the proper licenses, having sufficient registered capital under certain licenses, and some potential M&A, although most likely, they would be smaller in size. With all these factors considered, we also anticipate our operations to generate very strong cash flow throughout this year. At some point, if we look at our cash position and if we satisfy all these needs and have additional free cash available, we're not ruling out any sort of return to shareholders down the road. However, our current priority is to focus on expanding our operations and preparing for market demands. Regarding the Hong Kong listing, we are still working on some technical problem-solving. As you know, the Hong Kong Exchange has slightly different requirements, particularly regarding VIE structure and voting power. We need to make some changes and possibly some small restructuring under these new requirements, which takes time. Once we resolve these technical issues, we will officially move forward with the listing.

Ethan Wang, Analyst

So my question is regarding your current ratio. It would be helpful if management could help us break that down into Capital-Heavy and Capital-Light models to observe the trend here. Thank you.

Zheng Yan, CRO

Our last quarter delinquency rate has improved this quarter, particularly our performance in the Capital-Light model.

Alex Xu, CFO

Hi, sorry, this is Alex. I'll just translate for the audience. So basically, our D1 delinquency rate is currently about 4.8%, which is the best level in our corporate history. The 30-day collection rate in the first quarter was about 90%. We are continually making slight improvements from that level. The difference between capital-light and capital-heavy is that by definition, the capital-light approach offloads lower-quality assets. Thus, the delinquency rates for capital-light are slightly worse than those for capital-heavy, but not by a significant margin.

Haisheng Wu, CEO

I want to add some color to our asset quality. While investors tend to focus on delinquency rates, portfolio stability is essential to consider how many customers we acquire from various channels and how many of those receive approved credit lines. Essentially, we are acquiring more customers and maintaining a high approval rate while still achieving superior risk management performance compared to our peers.

Alex Xu, CFO

Thank you to everyone for joining us for the conference call. If you have additional questions, please feel free to contact us through our IR team. Thank you. Have a good day.

Operator, Operator

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