Yiren Digital Ltd. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Yiren Digital's Second Quarter 2020 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. I would now like to hand the conference over to your first speaker today, Ms. Lydia Yu. Thank you. Please go ahead.

Thank you, and welcome to Yiren Digital's second quarter 2020 earnings conference call. Today's call features the presentation by the Founder, Chairman and CEO of CreditEase and CEO of Yiren Digital, Mr. Ning Tang; CFO of Yiren Digital, Mr. Zhong Bi; and CRO of Yiren Digital, Mr. Michael Ji. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that can cause actual results to differ materially from those contained in any such statement. Further information regarding potential risks, uncertainties or factors are included in Yiren Digital's filings with the U.S. Securities and Exchange Commission. Yiren Digital does not undertake any obligation to update any forward-looking statements, except as required under applicable law. During the call, we will be referring to several non-GAAP financial measures and supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. I will now pass it on to our CEO, Ning, for opening remarks.

Thank you all for joining our second quarter 2020 earnings conference call today. With the pandemic still not far behind us and the changing market environment in the second quarter, we're making comprehensive progress toward our business transition in our creditech business and have achieved meaningful scale in our wealth management business growth. For our creditech business, I will provide an update on our three key areas of focus this year, as mentioned on our last call. First on product expansion, our new product initiatives are tracking very well. In connection to the launch of our new revolving loan product, Yi Xiang Hua, we launched an e-commerce installment consumption platform in August to provide a more integrated service to our customers and establish a longer-lasting relationship with them to realize more lifetime value. Yi Xiang Hua accounted for 13% of our total loan volume this quarter, growing over 500% quarter-over-quarter. On another hand, leveraging our vast offline service network coverage, we are ramping up auto loans nicely, achieving a 51% growth from last quarter. In terms of customer acquisition strategy, we are building up a credit ecosystem, connecting consumption scenarios with our financial products and services, and we are rapidly expanding our partnerships with large traffic channels including Sina Weibo, 58, Xiaomi, and many others are in the pipeline. Due to our channel partnership strategy, we have significantly reduced our online customer acquisition costs and improved conversion efficiency. As of June 2020, online customer acquisition cost represents 3% of loan volume. Secondly, on our transition to institutional funding, we have made great progress in repositioning our credit business by moving from a P2P funding model to a loan facilitation model. In the second quarter, 63% of loans facilitated were funded by institutional partners compared to 40% in the previous quarter, and we expect this proportion to continue to reach close to 100% by the end of this year with a diversified partner base. Lastly, on risk performance, with our prudent credit policy, ongoing effort to upgrade our borrower base, and the new initiatives in loan rework and collection, we have achieved positive results on the asset quality of our loan book this quarter, and we noted a clear decline in delinquencies that's trending to pre-pandemic levels. Next, on the wealth management business, we are seeing very strong growth momentum, particularly for our fund products. As of June 30, 2020, the number of current non-P2P investors increased 20% from last quarter to 31,530, and total assets under administration, or AUA, for non-P2P products increased by 48% quarterly to RMB 2.5 billion. More specifically, new investors for non-P2P products in Q2 increased by 62% from Q1, and AUA for bank products and funds increased 48% as compared with the prior quarter. Moreover, average AUA per investor for non-P2P products also sees steady growth, with average AUA per investor for the bank's fixed-income products exceeding RMB100,000 and for funds over RMB50,000, which is well above industry average. In June 2020 alone, sales volume for fund portfolio products reached triple-digit growth month over month to RMB162 million, for the bank's fixed income products, total AUA exceeded RMB1.5 billion as of June month-end, and the demand continues to be strong in July and August. We're also rolling out our insurance service offering and expect this to become a meaningful revenue contribution to our wealth management business towards the end of this year. To better position Yiren Wealth in China's digital insurance market and better serve our investors, we have invested in two new strategic initiatives. This quarter, we completed the acquisition of a licensed insurance broker. To date, the brokerage has established partnerships with 20 insurance companies covering over 190 insurance products. This will provide a strong and vital support for us to diversify our product offering and expand our insurance business. We are also preparing for the launch of a new securities business in the third quarter, which will provide our investors access to the capital and financial markets. Looking into the second half of the year, our main priorities for Yiren Wealth will be centered around customer acquisition, enhancing user management, including connecting each investor with exclusive financial advisers, diversifying the product mix, and expanding our investment advisory services. For customer acquisition, we aim to enhance our online customer acquisition capabilities through investment in new social media channels as well as offering three high-quality online introductory investment courses to attract users. Finally, I would like to announce changes in our management team. First, let me introduce our newly appointed CFO, Ms. Na Mei. She has served as financial controller for CreditEase's credit business unit since 2015 and she brings over 12 years of experience from PwC in finance, tax, internal controls, and consulting. I would also like to thank Zhong for his contributions to the company, and I wish him the best in his future endeavors. With our strategic focus to drive wealth management business growth, we also made several key talent hires to strengthen our management team. An identified individual will be joining us as Yiren Wealth COO, and he brings over 28 years of experience in marketing and brand management. In addition, we have also hired three highly experienced and senior personnel to manage our insurance, funds, and securities business lines who have previous working experience with leading financial institutions and technology companies. I look forward to working with each of them in their new capacity as Yiren Digital enters its new era of growth. With that, I will now turn the call over to our CFO, Zhong, who will discuss our financial results for the quarter.

Thanks, Ning. Hello, everyone. For our financial update, I will focus on key items of our business operation and financial performance. You can refer to the detailed financial results in our earnings release. On the credit side, loan originations for the quarter were RMB 2.4 billion, representing an increase of 31% quarter-over-quarter, thanks to our strategic initiatives this year in diversification of our loan products. Auto loans and Yi Xiang Hua, our small revolving consumption loan products now make up a major portion of our loan portfolios, representing close to 50% of our loans facilitated this quarter. On the wealth management side, as of June 30, 2020, Yiren Wealth has served approximately 2.2 million investors cumulatively and around 195,000 investors currently holding investment on our platform. Total AUA for Yiren Wealth reached RMB 28.4 billion as of June 30, 2020. Total net revenue was RMB 0.8 billion in the second quarter, representing a decrease of 26% from the previous quarter, primarily due to RMB 245 million revenue shortfall relating to our pandemic customer care program, where we offered payment relief for borrowers who were hit hard by COVID-19 as well as medical workers who fought against the pandemic to help ease their financial hardship and show our appreciation to the frontline workers. We proactively granted a concession to over 50,000 borrowers in principal, interest, and fees so that they could continue to make repayments, but at an amount lower than the contractual amounts. This represents a one-time hit to our revenue in an aggregated amount of RMB 245 million. However, we have already seen a significant recovery in these borrowers’ repayment behavior as there has been a 2x to 3x jump in monthly collection volume since the implementation of the program, and there’s a good chance that the incremental recovery repayment amount will finally surpass the total release amount. Sales and marketing expenses were RMB 508 million this quarter, representing 21% of loan volume as compared to 34% last quarter due to better cost control. Allowance for contract assets was RMB 169 million this quarter, equivalent to 7% of loan volume as compared to RMB 143 million last quarter, which was equivalent to 7.8% of loan volume. Net loss for the quarter was RMB 232 million, primarily due to customer care program, leaving a total of RMB 245 million in principal, interest, and late fees for our borrowers this quarter. Contributions to the credit assurance program were at 10.5% this quarter to ensure adequate coverage. Our credit assurance program remains adequately funded with a total balance equivalent to 13.8% of the total performing loan. On the balance sheet side, our cash position remains strong with RMB 3.4 billion of cash and short-term investments as of June 30, 2020. On funding, we are actively transitioning from a P2P funding model to a loan facilitation model. Over 60% of our loan originations were funded by institutions this quarter as compared to 5% a year ago, and we expect this ratio to increase to close to 100% by the end of this year. On employee compensation, to better attract and retain top talents, the company adopted a new share incentive plan this quarter, which has a 10-year term and a maximum number of 18,560,000 ordinary shares available for issuance. To prevent dilution to existing shareholders, CreditEase will surrender for cancellation and for new consideration an equivalent number of shares. Lastly, I would like to provide an update on our share repurchase program, which was initiated in Q2 2018. To date, we have already repurchased 368,686 ADS. We plan to continue to execute our share buyback program to improve shareholder value. As we note the continued improvement in market and the business conditions, we are confident in the performance of our business for the future. With that, I will now pass it on to Michael, our CRO, for an update on credit risk.

Thank you, Zhong. Hello, everyone. On credit performance, thanks to our continued efforts in risk management, delinquency rates have shown a progressive improving trend. 15 to 90 days delinquency has decreased to 5.5% as of June 30, 2020, from 8.9% as of March 31, 2020. 15 to 90 days delinquency further decreased to 5.2% as of July 31, 2020 as a result of our strengthened efforts in tightening controls and improving borrowers’ credit quality. This quarter, our team focused on the following initiatives in risk management: we restructured our collection team and simplified the organizational structure to increase the team’s operating efficiency, as well as to transition our collection method, emphasizing data-driven strategies and being result-oriented. To mitigate the risk caused by COVID-19 and help customers through the financial hardship, we launched seven related special collection projects in Q2, including continued pandemic customer care program, which offered payment relief for customers who were hit by COVID-19 and healthcare providers who are fighting the disease. These special collection projects helped us achieve a decline in NCL by over 10% as compared with projections at the beginning of the year, even facing economic headwinds. We will continue to strengthen our risk management and expect delinquency rates to further improve in the second half of the year. I will conclude my prepared remarks here and give it to the operator. Operator, we are ready for the Q&A.

Ladies and gentlemen, we’ll now begin the question-and-answer session. Our first question comes from the line of Alex Ye from UBS. Please ask your question.

Hi. Good morning, management. Thanks for taking my questions. So I have three questions here. First one is about the recently lower interest rate cap. So just wondering how would that affect your business? What is the current average pricing of your different products? And what’s your future plan in adjusting the pricing in order to be compliant? That’s my first question. And my second question is about your current product mix. So we currently have three types of product offering, if I understand correctly, the short-term revolving, the autos, and your traditional large ticket products. So could you give us a breakdown in terms of the contribution to the current quarter loan volume? And also related to that, what is the current expected vintage delinquency for each of these products? Lastly, my last question is wondering if you could give us any color on the revenue contribution from the non-P2P products, your wealth management business? Okay, thanks.

Sure. Thanks, Alex. I’ll start providing some answers to your question, then we’ll have Michael and Zhong answer some part of the remaining questions. In terms of the recap from the new decision by the Supreme Court, we’re studying the details and also consulting with the regulator as it is more addressing the private lending. As you can see, we’re rapidly transitioning from P2P funding into institutional funding partnerships, and how the rest of the industry complies with the decision is still in discussion. However, we have also evaluated the feasibility or the financial impact if we were to transition our product in full compliance with the 27% IRR pricing perspective. Currently, if you look at our average product mix pricing for the recent quarters, we’re about in the low 30 APR IRR base. There will be a bit of reduction on our revenue take rate. However, we believe that with the lower pricing, we will be able to manage the credit risk costs better, which will give us some benefits. Additionally, we expect that, in general, the overall funding cost for the industry will trend down. And at the same time, as you can see, we’re already making progress in terms of customer acquisition and operational efficiency improvement, particularly for some of our offline operations in terms of overall cost control. So even with the 27% IRR-based pricing, we’re very confident that we’ll have a sustainable, profitable business model for our credit business. As for the product mix, right now, in recent quarters, the online portion of our business is around 20%, mainly our smaller-tenor revolving type of loans. The auto loans probably represent about 50%. The rest are our traditional offline larger ticket loans and also some of our small business loans that are primarily in partnership with the e-commerce transaction platforms. Regarding the delinquencies, I think we will have Michael address the delinquency expectations on these products. Lastly, regarding your question about the revenue contribution from our non-P2P wealth management products, we expect the total revenue coming from our non-P2P wealth management business to become very meaningful by the end of this year, potentially reaching close to RMB100 million level. This revenue is recurring, which is typically stickier. Once we acquire customers who invest in our platform, we see a very high retention rate, and actually an increase in their AUAs per customer base. We’re very encouraged by the trends that we’re seeing. Maybe, Michael, you can comment on the vintage part.

Thank you for the question. To address the issue of vintage delinquencies, as mentioned in the prior conference call and the past months, we have employed a very prudent risk management approach to carefully manage our credit risk, especially on new acquisition loans. We have implemented this strategy in past quarters to improve our customer credit quality, ensuring we focus on serving customers with better credit quality. All of these approaches will help us to reduce our vintage sales. We anticipate seeing improvement over time, and our efforts are ongoing. This will remain a continued focus for us despite the new rate cap policy. For now, we are committed to our steady approach and strategy. Hopefully, that answers your question.

Okay. Thanks very much.

Our next question comes from the line of Yishan Wong from CLSA. Please ask your question.

Thank you, management. So I have two questions. We mentioned that towards the end of this year, almost 100% of our loan originations will come from financial institutions. Just wondering what is our current strategy on P2P? For P2P products, will they no longer support new loan growth down the road? That's my first question. And the second question is on our cooperation with insurance companies. Are we still competing with them? And do we see some pressure from companies like PICC Group? They mentioned a decrease in this business? Thank you.

Yes. Thanks for the question. Yes, that's correct. We're transitioning to the loan facilitation business model following the industry trends, and most of our business will be funded by institutional partners towards the end of the year. Of course, we're also working with the regulator for their guidance regarding the overall transition schedule. Regarding the insurance partnership we had previously, right now, for all the partnerships we have with institutional funding partners, we no longer need insurance design anymore. So this business is no longer ongoing. We're currently working directly with all the institutional partners for funding sources.

Got it. Thank you.

Our next question comes from Daphne Poon from Citi. Please ask your question.

Hi management, thanks for taking my questions. So just two questions for me. The first is regarding your online loan volume, which has dropped significantly over the past two quarters, both on a Q-o-Q basis. So I’m wondering what's happening with your online customer acquisition strategy there? Do you expect the online portion to continue to decline, and are you shifting your focus more towards the offline channel? The second question is about your customer care program mentioned earlier. I just want to understand better: first, how many borrowers received payment relief under this program? Did you waive the entire outstanding principal interest, or just a portion of that? If you could explain more on that part, it would be helpful. Thank you.

Sure. I will answer the first question, and maybe Michael can provide more color on the customer care program related questions. So yes, the percentage mix of online business volume dropped a little bit in recent quarters. I think the main thing is that as we transition from traditional larger ticket, longer tenure online loans into more revolving type, small size, and shorter duration loans, we are taking a careful approach. However, you can see that the volume is ramping up quite nicely, and we expect this new online product to continue to grow towards the end of the year, becoming a meaningful portion of our business, probably reaching 1/3 at least in terms of sales volume going forward. For supporting this business, as we mentioned, we're both working with large Internet traffic platforms in a partnership perspective for very efficient customer acquisition costs. Additionally, we're rolling out an e-commerce platform where we bring e-commerce providers onto our platform to serve our existing customers. In that sense, we provide our customers with consumption scenarios and gain a better understanding of how they spend and how their credit quality is evolving. So we expect this to become a very meaningful part of our new business initiatives for our online operations. So Michael can now provide more color on the customer care program.

Sure. Thank you. To the customer care program, cumulatively, over 100,000 customers benefited from this payment relief program, which received very good responses and helped build good customer relationships. Regarding the question about principal waivers, the program includes waivers of principal interest and late fees as mentioned earlier, but we don't waive the entire principal. It's just a portion with a tailored approach based on individual customer situations. Does that answer your question?

Will you be able to share or disclose roughly what's the percentage of principal?

It depends. It's a mix of strategy. It varies based on customers' situations and the loan itself. It’s a complex strategy without a straight line or simple number to define it. It is a very well-defined, well-designed strategy.

Okay. Understood. Thank you.

Yes. Maybe just one thing to add on that: as we mentioned in the prepared remarks, after implementing this policy, we already see very encouraging signs of a jump in borrowers' repayment schedules. We believe this investment is likely to create good returns for us through this program.

There are no more questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Okay. Thank you. Bye.

Thank you.