Earnings Call Transcript - QFIN Q3 2021

Mandy Dong, IR Director

Thank you. Hello everyone and welcome to our Third Quarter 2021 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Haisheng Wu, our CEO and Director, Mr. Alex Xu, our CFO and Director, and Mr. Jung Yan, our CIO. Before we begin the prepared remarks, I would like to remind you of our safe harbor statement in our earnings press release, which also applies to this call. We may refer to forward-looking statements based on our current plans, estimates, and projections. Also, this call includes discussions of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP numbers. Unless otherwise stated, all figures mentioned are in RMB. I will now turn the call over to our CEO, Mr. Haisheng Wu.

Haisheng Wu, CEO

Hello everyone. I'm very happy to report another strong quarter. This marks the sixth consecutive quarter of record-breaking results since the pandemic last year. During the quarter, total facilitation volume reached RMB 97.6 billion on our platform, marking another record high at 48% year-on-year and 10% quarter-on-quarter. Outstanding loan balance reached RMB 133.4 billion, up 58% year-over-year and 13% quarter-on-quarter. Total revenue was RMB 4.6 billion in Q3, up 25% year-on-year and 15% quarter-on-quarter. Non-GAAP net income was RMB 1.63 billion, up 27% year-on-year and 1% quarter-on-quarter. We are not changing work and the market hot topics come and go. Our results demonstrate our team's dedication to consistently deliver record-setting performance quarter after quarter. We've got a lot of questions about recent methods in our development. We have maintained communication with regulators in recent months, so let me share some updates here. Gratification is the top priority for 14 leading internet platforms summoned by regulators earlier this year. The majority of the issues must be addressed by the end of this year. On October 19, 2021, the PBOC Chairman of the IRC stated publicly that in the process of rectification of the 14 leading internet platforms, regulations raised over 1,000 issues. We have received proactive responses for the majority of the issues and about half of the issues have been resolved. As such, we anticipate more substantive programs by the end of this year. Compared to other platforms with a financial holding company structure, we don’t do payment business, nor do we offer sophisticated one-stop financial services. Our business model is rather simple and straightforward; thus, we have far fewer issues than most other platforms. Currently, we are progressing based on the regulatory timeline, which includes enhancing corporate revenues, adjusting operations on various licenses, and optimizing the user experience. We are very confident in completing these compliance-related items by the regulatory deadlines. In addition to consumer loan users, our SME and large-ticket loan users have both grown nicely, and the quality of our SME clientele continues to improve. The average credit line for SMEs was up by 34% year-on-year. As such, our customer division metrics are no longer a proper manager to evaluate our user application efficiency. We have established a more diversified matrix that has better quantity and higher quality. Our embedded finance API model continues to grow rapidly, maintaining our leadership position. In Q3, more than half of our new consumer loan borrowers were acquired under this model. On the funding front, we will gradually expand our collaboration with national banks and diversify beyond consumer finance companies and urban commercial banks. Currently, we have several national banks in our pipeline, including Everbright Bank, Deutsche Bank, and Pudong Development Bank, among others. Expanding relationships with larger national banks will provide us with a more stable funding source at a more attractive cost. In Q3, our overall funding costs remained at around 6.7%, near historical lows. Finally, a note on our guidelines for Q4. It is already in the middle of November. Based on our year-to-date performance and the business momentum so far this year, we are confident that we will deliver a solid Q4 and exceed our previous full-year loan volume guidance.

Alex Xu, CFO

Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our quarterly earnings call. For the interest of time, I will not go over all the financial line items on the call. Please refer to our earnings release for details. As Haisheng Wu mentioned, we delivered the sixth consecutive quarter of record-breaking results in both operational and financial terms for the third quarter of 2021 in a relatively muted macro backdrop. We saw continued strong consumer demand for credit and stable asset quality. Our faster-than-market growth suggests that we continue to gain share in the target segment. Total net revenue for Q3 was RMB 4.6 billion compared to RMB 4 billion in Q2 and RMB 3.7 billion a year ago. Revenue from credit-driven services was RMB 2.62 billion compared to RMB 2.4 billion in Q2 and RMB 2.96 billion a year ago. The year-on-year decline was mainly due to a change in facilitation mix as capital-heavy loan volume decreased significantly. Meanwhile, capital-heavy facilitation revenue take rates improved modestly quarter-on-quarter. Revenue from platform services was RMB 1.99 billion compared to RMB 1.6 billion in Q2 and RMB 748 million a year ago. The robust growth was mainly driven by continued progress we have made in our capital-light technology solutions. During the quarter, capitalized and other technological solutions contributed roughly 57% of total loan volume, and capitalized facilitation revenue take rate also improved nicely. The average pricing was 26.1% compared to 27.2% in Q2 and 25.9% a year ago. As the 24% rate cap is being implemented across the industry gradually, we are expecting average pricing to trend down by about 1% each quarter through mid-2022 to satisfy the rate cap requirement.

Richard Xu, Analyst

The management mentioned that 60% of loans are already priced at below 24%. What's the gross and net take rate and risk profile of the client base? And that will give us probably a better indicator of the profitability after the transition periods.

Haisheng Wu, CEO

First, thank you Richard for your question. I will give you some color about this take rate. For the network rate, our assets below 24% is 1% lower than our current total loan book, which is 3% on net take rate. Secondly, as for the risk profile of this 24% capped assets, what we observed is in Q3, the new transactions have better risk performance than the existing assets. In terms of day one delinquency metrics, the new transaction rate is 4.2% compared to 5.1% for the total loan book. Moreover, the D1 delinquency rate has declined for five consecutive quarters, while it's 5.1% in this quarter, slightly higher than the second quarter. The 30-day recovery rate increased from 90% in Q2 to less than 90% this quarter. We are very confident that these changes are controllable. They believe that changes that affect costs are short-term and temporary, which will have a limited impact on our customer payments. Our customer acquisition and risk management teams have responded proactively. For instance, we have improved our intelligent marketing strategy to focus on user quality and acquisition efficiency. For people borrowing from multiple platforms, we have lowered the approval rate. We’re able to increase credit lines by 28%. With our improved customer base and risk management optimization, we can keep risks within expected ranges in the future.

Alex Xu, CFO

Well, let me clarify this. We still see the same logic as we mentioned after the second quarter results. If you recall, we conducted a stress test under the 24% scenario. Essentially, we see a 1% drop when everything has been said and done. When the entire portfolio moves below 24%, the average pricing will probably be sitting somewhere around 22.5%, and the net take rate will drop from roughly 4% to about 3%. That’s our outlook for the moment.

Yao Lee, Analyst

I see some of our risk metrics are on the buy-sell level in Q3. Looking forward, with interest rate regulations declining and lower originations continuing to increase, can we expect to see better levels of risk metrics, or is what we see now the best we can do?

Haisheng Wu, CEO

We can say that as the proportion of new transactions increases and customer quality improves, risk performance will eventually improve as well. However, there will be cyclical fluctuations due to regulatory changes. It’s a process that requires time.

Alex Ye, Analyst

My question is regarding regulations. In your prepared remarks, you mentioned considering different options regarding the Company's financial licenses. Could you give us additional color on that, particularly with the news that one of your micro-loan licenses has increased capital from 500 million to 1 billion? What's your consideration behind that?

Haisheng Wu, CEO

Compared to our peers, we are one of the fewer companies with direct dialogue with regulators. Therefore, we can proactively follow regulatory guidance based on our first-hand information. Firstly, for our credit rating agency, we will actively participate in applying for new credit rating licenses. Secondly, we will consider injecting capital into the licensed entities, as we have sufficient capital reserves. We might need to exit from one guaranteed company, but there will be very muted impact on our operations.

Mandy Dong, IR Director

To clarify Alex’s point, we currently hold two financial guaranty licenses. According to the new regulatory guidelines, an entity can only hold one, so we will consolidate these into one license. This will not impact our operational capacity, as it's primarily based on registered capital.

Thomas Chong, Analyst

My question is about the 2022 outlook. Though it's a bit early to discuss next year's numbers, given the macro headwinds, how should we think about our business growth momentum for next year?

Mandy Dong, IR Director

The market may have concerns about the microeconomy next year, but we are closely monitoring operational matters. Currently, we are still in the budgeting process, and we do not have more concrete guidance to share. However, we are confident in our resilience given our experience with previous regulation cycles and the pandemic.

Alex Xu, CFO

Regarding the outlook for 2022, we cannot provide any official guidance at this point. However, based on our stress test assumptions from the second quarter, which considered the macro environment and regulatory changes, we believe a 20% volume growth for next year is still valid. Thank you, everyone who joined us for the call. If you have additional questions, please contact us directly.