Earnings Call Transcript - QFIN Q1 2021

Mandy Dole, IR Director

Thank you. Hello everyone, and welcome to our first quarter 2021 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. Before we begin the prepared remarks, I would like to remind you of the company's Safe Harbor statements. Except for historical information, the materials discussed here may contain forward-looking statements based on our current plans, estimates, and projections; therefore, you should not place undue reliance on them.

Haisheng Wu, CEO

Hello, everyone. I'm very happy to report a stellar quarter that exceeded our expectations across the board. The strong growth momentum that we saw in 2020 Q2 continued in the first quarter, and we had another record-breaking operational result. During the quarter, total loan facilitation was RMB74.1 billion, up 40% year-over-year. The outstanding loan balance increased by 38% year-over-year to RMB101.9 billion, exceeding RMB100 billion for the first time. Total revenue was RMB3.6 billion, up 13% year-over-year. Non-GAAP net income was RMB1.4 billion, up 452% year-over-year. As we execute on our various strategic initiatives and overall market demand continues to recover, we expect to maintain this robust growth momentum in 2021. While maintaining strong growth, we made significant progress in our technology-driven strategy upgrading and the transition. Loan facilitation under the capital-light model and other tech solution models exceeded 50% of total for the first time. This ratio increased further to 55% in recent months. This marks a fundamental change in the nature of our business. In addition, our tech-empowered business line has advanced on multiple fronts. Our smart marketing service product, Intelligence Credit Engine, CE, delivered rapid growth in April. Key monthly operating metrics of ICE, such as users with approved credit lines, transaction volume, and outstanding balance doubled from the 2020 year-end levels. In particular, the transaction volume in April rose by an impressive 200% from the 2020 year-end levels. Moreover, our risk management RM SaaS product expanded rapidly. We have now established collaborations with 29 financial institutions under this model and have another nine in the pipeline. In terms of strategic growth drivers, we are very pleased to report remarkable progress in key initiatives such as the embedded finance API model, SME finance, and our collaboration with Kincheng Bank of Tianjin, known as KCB. We believe we have successfully upgraded our core growth engines with more comprehensive and diversified operations.

Alex Xu, CFO

Okay. 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 the details. As Haisheng mentioned, we experienced robust consumer demand for credit, along with further improvements in asset quality in Q1 as the Chinese economy continued on a steady upward trend and the seasonality related to the Chinese New Year was muted compared to normal. Total net revenue for Q1 was RMB3.6 billion versus RMB3.34 billion in Q4 and RMB3.18 billion a year ago. Revenue from credit-driven service capital-heavy was RMB2.45 billion compared to RMB2.56 billion in Q4 and RMB2.81 billion a year ago. The sequential and year-on-year decline was partly due to the change in facilitation volume and mix, as the capital-heavy contribution decreased significantly. Although recovery in average pricing offset some of the negative impacts on a sequential basis, during the quarter, average pricing was about 26.6% compared to 25.3% in Q4 and 28.2% a year ago. Going forward, we expect a relatively stable pricing environment throughout 2021. Revenue from platform service capital-light was RMB1.15 billion compared to RMB780 million in Q4 and RMB373 million a year ago. The robust growth was mainly driven by a 58% sequential growth in facilitation volume from capital-light, ICE, and other technology solutions. While the underlying take rate for the platform services were relatively stable, we expect capital-light contribution percentage to continue to increase throughout 2021, eventually accounting for a clear majority of our total volume by year-end. As macroeconomic activities continued to recover in China, demand for internet traffic also increased significantly. As a result, we experienced some uptick in sales and marketing expenses; the average customer acquisition cost per user for the approved credit line was RMB217 in Q1 compared to RMB198 in Q4. Meanwhile, we also noticed a clear pickup in customers' drawdown activity during the quarter. As a result, we were able to maintain stable and satisfactory ROI despite increases in customer acquisition costs. We will continue to use lifecycle ROI as a key metric to determine the pace and scope of our customer acquisition strategy. For 2021, at this point in time, we believe current market conditions support a more proactive approach to accelerate the growth of our business. Non-GAAP net income was RMB1.41 billion in Q1 versus RMB1.31 billion in Q4 and RMB255 million a year ago. We once again set a new record in quarterly profitability, driven by higher facilitation volume and noticeable improvement in asset quality.

Jacky Zuo, Analyst

So, thanks for taking my questions, and congrats on the strong results. I have two questions. Number one is about our SME loan products. We have seen very strong growth in our SME financing, and I want to understand what the APR loan size unique economies are about these SME financing products? And what is our loan volume target for SME this year? Also, Mr. Wu, our CEO, mentioned that the take rate is now about 8%. How does this compare with our overall loan take rates? Secondly, regarding our tech exports business, which is the ICE, I want to understand the difference between ICE and our other capital-light loan products, what the take rates are, and who our bank partners are for this product? I observed that our reported loan volume definition changed this quarter to include the ICE loan volume. So, I want to check the ICE loan volume for this quarter and last quarter.

Haisheng Wu, CEO

Sure, Jacky, let me handle your first question. You're absolutely right; we see significant growth in our SME business in the first quarter. As you know, there are two types of SME products in the market. The first type is more related to consumer finance products. Many of our peers extended existing consumer finance products to the management or owner of SMEs, which has a similar unit economy with consumer finance products. This is not what we are pursuing. The second type is what we are pursuing now, which is more closely related to the SME enterprise itself. We focus on the operational metrics of SME companies. By doing this, we leverage our existing expertise in consumer finance to develop a dual-core risk management model, meaning we evaluate the SME owner both as an individual and as a SME enterprise, which leads to much better unit economy than general consumer products. As for the average APR of this product, it is around 20%. For those more related to tax or invoice SME loans, the average APR is around 16%. The ticket size of the SME loan is RMB210,000. As we mentioned in the prepared remarks, the take rate is around 8%, which is almost double the size of consumer finance loans. Regarding your second question about the ICE products, Intelligence Credit Engine primarily focuses on smarter marketing services. We have accumulated around 100 financial institutions due to our long-term cooperation with them, allowing us to understand their preferences well. We categorize them according to their risk management capabilities. For those looking to improve their risk management or already possess strong risk management skills, we deliver the ICE product, focusing solely on customer acquisition services. Therefore, compared to the capital-light model, the ICE model provides customer acquisition service with a comparatively lower take rate. As we cover various types of financial institutions like consumer finance and corporate banks, there are not many differences in the low assets allocated to them. As we mentioned in the remarks, the loan volume of ICE reached RMB2.4 billion compared to last quarter's figures.

Jacky Zuo, Analyst

Thank you.

Richard Xu, Analyst

I have two questions. One is regarding the funding partners. We are certainly increasing our cooperation with Kincheng Bank, but going forward, how do we allocate the loan allocation among different funding partners, and are there any major differences in the take rate? Secondly, regarding volume allocation between ICE products and others, I would like to understand the long-term strategic thinking on the loan applications.

Haisheng Wu, CEO

Sure, Richard, let me address your funding question. The diversification of our funding sources is always a goal we pursue, and we will maintain that. Regarding KCB, as you know we have a prudent relationship with them, and it’s beneficial as KCB serves as a showcase to demonstrate to other financial institutions. Also, we carry out many strategic initiatives this year, making it easier to explore new products with KCB's collaboration. Yes, due to our long-term relationship with KCB, there might be short-term differences compared to the take rate when cooperating with other financial institutions, but we will definitely work with all partners with a long-term view. The fundamental reason is our loan products are very competitive in the market. Even if there are short-term differences in business terms between KCB and other financial institutions, KCB can serve as a showcase, and over the long-term, other financial institutions will catch up with us. As for how we allocate different assets or products among these 100 financial institutions, we look at the business needs from the funding partners. For instance, if a funding partner needs our comprehensive products, we provide capital-light products. If they are strong in risk management capabilities, we deliver smart marketing products, and if they already have a very strong source of customers, we provide an RM SaaS product. Overall, we deliver services based on our funding partners' business needs. Thank you, Richard, hope I answered your question.

Unidentified Analyst, Analyst

Hello management, thanks for taking my question and congrats on your solid results. I have two questions: first, regarding our strategic partnership with KCB. I’ve noticed that KCB has become the largest institutional partner in terms of the loan facilitation volume. Could you please share how much contribution actually comes from KCB in terms of loan origination in Q1 2021? Second, regarding our progress on the SME loan business. Given our SME loan business has been on track, can you elaborate on how much contribution comes from SME loans in terms of loan origination in Q1 2021? And how much contribution do you expect it to be by the end of this year? Thank you.

Haisheng Wu, CEO

Yes, you're right. KCB has already become our largest partner regarding business volume. As mentioned in the prepared remarks, in Q1, the GMV we cooperated with KCB totaled RMB18 billion, with a loan balance of RMB13.3 billion. As we further advance our business initiatives with KCB, we expect to see this number increase in the following quarters. Regarding your second question about the SME loan, we mentioned that there are two definitions for SME. The broader definition includes consumer finance loans related to SME management, which contributed around 30% to 40% last quarter, and we expect this number to rise to around 60% to 80% by year-end. The stricter definition of SME is focused on the SME enterprise itself. We target a loan balance of RMB10 billion by year-end, as you may recall, our guidance for total volume is RMB310 billion to RMB330 billion at year-end, which will provide the contribution ratio. Let me add more context about SME. Although it's early stage for this product, we are trying different strategies to develop it further. For instance, with very premium SME enterprise borrowers, we may grant around RMB1 million ticket size products and expect to share more results as we gather them.

Alex Xu, CFO

Sorry, Alex, CFO here. I would like to add a couple of details to your questions. Regarding KCB's volume, as Haisheng mentioned, the accumulated volume from KCB up to April is about RMB18 billion. However, regarding Q1, KCB's volume is roughly RMB10.8 billion. You can use that RMB10.8 billion to calculate the percentage ratio. Then regarding the SME, as Haisheng mentioned, there are indeed two definitions. We use the narrowest definition for SME, meaning loans issued to enterprises with actual operations, sales receipts, and taxation information. For this, the total loan volume in Q1 was RMB5.8 billion. The loan balance for this restricted definition is roughly RMB7.5 billion at the end of the first quarter. Keep in mind that narrowly defined SME loans typically have a much longer duration than consumer loans, which will lead to a rapid buildup of the balance over time.

Steven Chan, Analyst

I have two questions. One is a follow-up question on the SME loan facilitation business. I would like to understand the sale of secured versus unsecured SME loans up to maybe April. And how does the asset quality of SME loans compare to consumer finance loans in different asset quality indicators? That's the first question. The second question is, could you just tell us why we have a rise in customer acquisition costs in Q1 on a quarter-over-quarter basis, and what will be our outlook on the trend of customer acquisition costs for the rest of 2021? Thanks.

Yan Zheng, CRO

Our SME customer acquisition costs are lower than the overall market, about 70% to 80% of overall levels, and we use the risk management approach for the SME product, focusing on enterprise-class business owners while also managing individual customer risks. This is clearly the difference between individuals and small businesses.

Haisheng Wu, CEO

As previously stated, when we conduct our real operations, it's not as simple since we focus on ROI, return on investment. In the first quarter, we successfully conducted a better customer acquisition strategy, which is demonstrated by a higher customer approval rate and larger ticket size, ultimately improving the ROI. If we focus purely on CAC metrics, the larger ticket size and longer duration of SME loans, along with their lower APR, will increase this number. However, in actual business operations, we believe expanding into SME is a much better business decision for us since asset quality is better, resulting in higher ROI and better unit economics.

Alex Xu, CFO

Steven, this is Alex again. I just wanted to add a follow-up point to Haisheng's statement. As we expand into the SME sector, one characteristic of the SME business is the large ticket size and longer duration loans, which are associated with a higher per-ticket customer acquisition cost. As we grow the SME business proactively in Q1, this mix change resulted in a higher per credit line customer acquisition cost. If you remove the SME portion and just look at the consumer portion, the change was not as significant as the reported figures. So, I just wanted to add that point. Thank you. Thank you, everyone, for joining us for the conference call. If you have additional questions, please feel free to contact us. And that's it for the call. Thank you.

Operator, Operator

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