Yiren Digital Ltd. Q3 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Yiren Digital Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised this conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Keyao He. Please go ahead. Thank you.

Thank you, operator. Good evening, everyone. Today's call features a presentation by the Founder, Chairman, and CEO of CreditEase and our CEO, Mr. Ning Tang; and our CFO, Ms. Na Mei. Ms. Mei Zhou of SVP; Mr. George Liu, our CRO; and Mr. Raymond Fung, CEO of Yiren Wealth, who will also join the presenters in the Q&A session. Before beginning, I 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 statements. Further information regarding potential risks, uncertainties, or factors is included in our filings with the U.S. Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements as required under applicable law. During the call, we will be referring to certain 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 those non-GAAP financial measures or reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it over to Ning for opening remarks.

Hello, everyone. Thank you for joining us today. We are delighted to announce a solid quarter with a visible increase in profitability and healthy growth in business scale amid a muted macro environment. At the beginning, I would like to reiterate our strategic positioning as a user-centric personal digital financial management platform as our business models continue to integrate and expand. In the third quarter, we saw growing interactions and synergies between business lines. For example, the total number of investors who purchased Hexiang long-term insurance products on the Yiren Wealth platform this quarter increased by 37% compared with the second quarter this year, while the number of borrowers cumulatively served with our insurance products as of September 30 grew 33% compared with the end of last quarter. So by personal digital financial management, we mean to serve our customers in the long run and to meet their comprehensive financial management needs, including liquidity management, income generation, financial protection, and value enhancement, which corresponds to our credit-tech and wealth management services. Now, I will go through our business update on wealth management. As of September 30, 2021, total client assets exceeded RMB17.4 billion, representing a 19% growth from last quarter and about 250% growth from the prior year. Total number of active investors grew 11% quarterly to about 428,000. More specifically on the Yiren Wealth platform, we saw accelerated growth in both new investors as well as average client assets due to our precise targeting acquisition strategy and optimized services and products. In the third quarter, the number of new investors on the platform reached nearly 10,000, representing a 33% increase quarter-over-quarter. Excluding insurance products, average client asset per investor reached RMB259,000 representing a 125% annual growth. Particularly, the number of investors with client assets over RMB500,000 grew almost three times compared with last year, and that trend continues going into the fourth quarter, a clear reflection of our enhanced capabilities to serve a higher segment of our investor spectrum. Moreover, as our investor education further penetrates and the concept of balanced asset allocation is becoming increasingly accepted, the number of investors holding at least two different asset classes on the Yiren Wealth platform grew 168% year-over-year. Talking about precise targeting acquisition strategy, our finance plus life initiative is worth mentioning. Through years of operations, we found a common need in our investors in four specific scenarios, namely; health and sport, study and self-improvement, lifestyle and leisure, child education, and parenting to better serve our investors and target these common needs. We recently started to offer selective life services and products tailor-made for investors. These non-financial services are proven effective to both attract new investors and to enhance our existing users’ LTV. Through finance plus life strategy, we’re building up a broader Yiren Wealth community consisting of high-quality users who have the common pursuit of better wealth, better self, and a more positive life spirit, which is translating into comprehensive growth in Yiren Wealth and we expect more promising results to come in the following quarters. Next, on to our Hexiang insurance brokerage business, we are pleased to deliver better-than-expected growth this quarter. Hexiang contributed RMB735 million in total premiums, up 29% quarter-over-quarter and its commission revenue reached RMB199 million, up 31% compared with last quarter, and up 95% from the prior year. In the beginning of November, Hexiang had already completed our full year internal target in both premium and revenue. Hexiang is positioned as a national comprehensive customized insurance service provider and it stands out in its strong capability in product innovation and customization. For instance, this innovative annuity product launched in May endured immediate popularity with premium of RMB285 million as of end of the third quarter. Moreover, Hexiang's high standard services also gained market recognition. In the third quarter, long-term insurance renewal rate stood at 98%, much higher than the common industry standard of 85%. Moreover, Hexiang's unique 2B2C business model has proven effective in market expansion. By working with 2B channels with a considerable customer base, Hexiang has embedded their tailor-made insurance products into these 2B platforms and the scenarios. This is a win-win solution for both Hexiang and our channel partners. For Hexiang, we have effectively acquired consumers at minimal cost, while for business channel partners we help them realize additional revenue streams and enhance their customers' LTV. Hexiang is currently operating with over 100 insurers and brokers nationwide, offering more than 510 products. With new products going to hit the shelves in the coming days, we expect further growth in the quarters to come. Now, I will outline some highlights for our credit business. In the third quarter, our total loan facilitation volume maintained a strong growth trajectory, reaching RMB6.8 billion for the quarter, representing an increase of 30% quarter-over-quarter and 117% year-over-year. Total number of borrowers served this quarter was 548,000, increasing 26% from the prior quarter. On loan products, Yi Xiang Hua, our small revolving loan product witnessed continued rapid growth and a clear increase in borrower base due to our enhanced digital operating capabilities and improved servicing standard. In the third quarter, loan volume of Yi Xiang Hua stood at RMB3.4 billion, accounting for close to 50% of total loan volume and representing almost five times growth compared with the prior year. Meanwhile, monthly active users on our Yi Xiang Hua app reached 1.1 million as of September 30, jumping 82% quarter-over-quarter. Further increase in customer activity is expected as we start to embed more diversified consumption scenarios on the platform and the scale-up of our own traffic pool. Moreover, as our repeat borrowing rate continues to rise and our consumer traffic base starts to convert into new loans, we have managed to keep our customer acquisition costs at a low level, translating into healthy product unit economics. Furthermore, I want to share with you our progress on SME loans which we started to focus on in the second half of this year. We are pleased to see robust growth in SME loan business with its volume increasing by over 400% quarter-over-quarter, now accounting for 25% of total loan volume. It is worth mentioning that small and medium enterprise loans are priced under 24% APR. As we are in full swing to dive into this SME market, we expect the SME loan volume to continue to grow in the coming quarters, further optimizing our product mix and paving the way for us to accomplish compliance transition. Talking about compliance and APR cap requirements, we have been executing three concrete strategies to ensure effective conditioning while maintaining profitability. First, like I just mentioned above, we are filling up SME loans to better support the real economy and to respond to regulatory direction. Second, we have been proactively offering lower price revolving loans to our existing customers with higher credit quality. Thirdly, we have been improving our customer mix and acquiring new customers with better credit performance through our diversified online consumption scenarios. Through the combination of these three efficient strategies, we are very confident to be able to complete our progressive adjustments by the second quarter next year. Moreover, for the new guidelines related to credit scoring, we have been in close communication with regulators and are exploring different options to ensure our compliance. So far, we have already signed an agreement with a licensed credit rating agency and we are in the stage of testing detailed cooperation models, which will take some time due to the complexities surrounding operational flow as well as test capabilities. We expect to finish the connection within the guided grace period and the relevant costs will be manageable. We will continue to pay close attention to regulatory guidance as well as industry standards and make timely adjustments as needed. Last but not least, as we refine our risk management systems and enhance our asset quality, our 15 to 89 days delinquency rate remained low at 2.4% and we expect our credit performance to remain stable during the transition and to experience an overall improvement in the long run, as we continue to optimize our customer mix. Going forward, we will continue our efforts to drive up our business scale and create stronger synergies not only within our wealth management ecosystem but also within the whole Yiren Digital ecosystem. Meanwhile, as our investors are showing growing demand for higher investable amounts, we will serve them with more diversified products with a bigger ticket size, further driving up our profitability. Additionally, as our credit-tech business continues to move toward a higher quality customer segment, there will be growing synergies and overlap between credit and wealth management businesses in the long run. Now, I will pass it on to Mei who will provide this quarter's financial update.

Thank you, Ning. Dear analysts and investors, good evening. For this quarter's financial update, I will focus on key financial highlights only. For further details of our financial performance, you can refer to the detailed financial results in our earnings release and deck that has been posted on our website. I am very happy to share with you another solid quarter with strong growth achieved across revenue, profit, and transaction volume on a year-on-year basis as we continue to see strong consumer demand from financial management services. Total revenue in the third quarter was RMB1.2 billion, increased 20% year-over-year. This quarter, revenue from wealth management service accounted for close to 30% of our total revenue, becoming a significant revenue driver. On the credit side, total loans facilitated this quarter was RMB6.8 million, up 117% year-over-year and the revenue from loan facilitation service increased 48% from prior year accordingly. Loan facilitation revenue take rate decreased year-on-year due to a shift to the shorter lender loan product as well as due to price cuts as we adjust our loan portfolio to below APR 24%. Q3 operating expenses decreased by 10% year-on-year to RMB0.8 million, and sales and marketing expenses decreased by 15% from prior year to RMB407 million, driven by increased consumer acquisition efficiency. Our original and service expenses decreased 22% from prior year to RMB187 million, mainly due to input collection efficiency. Allowance for contract assets, receivables, and others was RMB83.6 million this quarter, equivalent to 1.2% of loan volume as compared to 1.8% last quarter. The decline was largely driven by improved asset quality as a change of product mix. Net income grew three times year-on-year to RMB0.3 billion, reflecting a net income margin of 26% mainly due to our continued efforts on cost control and increasing operating efficiency. In terms of our pipeline APR cost in our loan pricing, we also have confidence in our ability to maintain healthy growth and profitability in the transitional year of 2022 and resume more robust profitability growth upwards. Turning to our balance sheet, we ended the quarter with RMB2.3 billion in cash and cash equivalents, up 6% from the prior quarter, leaving us with sufficient reserves to seek any new opportunities. This concludes our closing remarks. Operator, now we are open for questions.

Hello, operator. We are open for a Q&A session, please. Thank you.

Thank you. The first question comes from Boyd Heinz from Equinox Capital. Please go ahead.

Hi. Thank you for taking my questions. Good evening and a very nice quarter. I have a number of questions. What was the APR for loans initiated in the quarter and what was the average loan tenure?

Boyd, hello. This is Na. I will answer your question. Our average loan tenure is about 28 months, but we expect, in line with that, the tenure will be shortened to about 10 to 12 months by the end of this year. The total loans at 24% APR account for about 30% in the quarter, and are expected to be close to about 50% by the end of this year.

Okay. And can you discuss how your business has been progressing so far in the fourth quarter? I see that you did not provide much guidance for that. You did say that the economy is muted. So if you could discuss that, that would be great. Thanks.

Yes. As we mentioned, there is no guidance for our re-evaluation cap; it is not effective after this year. But as mentioned in our CEO's script, you can notice that our SME loan has increased significantly. Last year, it was below 1% for that year. But for this quarter, it accounts for about 24%. For all of our SME loans, the pricing is below 24%, even below 18%. So we think that in line with the increase in the portion of SME loans, the APR is much lower; and another reason is that we believe our focus is on our planned policy. I think that will lead to better risk assessment. With improved risk management, we should have the ability to lower our prices to attract more risk clients. I believe we can increase our APR up to the 24% potential pattern. However, as we mentioned, the regulatory guideline was last year. Thus, we will focus on regulatory improvements and we'll adjust our strategy gradually.

Given the increasing competition for higher quality borrowers and the impact of the interest rate cap, can you discuss your outlook for pre-tax or operating margins in light of these pressures?

Yes. Currently, our gross revenue is about 20%, and our acquisition cost is 2% or 3%. Our other operating costs range from 1% to 3%. We hope that all our operating costs will decrease by about 1% or 2% in the first quarter. We will also enhance our cost efficiency next year. I believe this is another driver for our profitability.

Just last question, and this is about a possible share repurchase or dividend. Do you have cash that's offshore that could be used right now to repurchase shares, given that the ADS is trading well below book value and at very, very low valuations? It just would seem to make a lot of sense here to start aggressively repurchasing shares. Thank you.

Yes, I can suggest something. If you have something else in mind, I can connect you with our CEO, Tang Ning. As we mentioned, we have about RMB2.3 billion in deposits available. However, our market value is significantly lower than our cash on hand. Therefore, it is common practice to consider share repurchases. In the second quarter, we completed our share repurchase program. However, in light of our future business strategy, there are still many uncertainties. We believe it’s important to keep enough cash for our future business development. Of course, we will discuss any strategies regarding share repurchases or dividend payments. But initially, we think we should stick to our strategy and focus on performance development due to the existing uncertainties.

Okay, great. Thank you very much, and good luck in the coming year.

Thank you. Your next question comes from Allan Young from Golden Dragon. Please go ahead.

Yes. Thanks, and congratulations on the good results. We've discussed the topic about the shift to lower pricing earlier. Can you elaborate a little bit more on the pace of pricing shift toward 24 in 2022? I know you are targeting around 50% 24% loans by the year end. And the second question is what is the take rate outlook in 2022 as we complete the shift of pricing? And how do we arrive at such take rate, for example, credit funding? Thanks.

Yes. Thank you. This is Na. I will answer your question. Regarding the pace of lower APR pricing, as I mentioned in the previous question, we're transitioning our pricing to the 24% cap. You also mentioned that our gross revenue is currently about 20%. For the 24% price cap, we still have confidence in our profitability because of better asset quality, lower fund costs, and lower acquisition costs. We expect to see a net revenue margin of about 4% to 5% as we shift. However, it will also impact risk management, funding cost, and acquisition cost to decrease to 3%, 1%, and 1%, respectively. Thus, we remain confident that the net revenue margin will stay stable compared to now. Did that answer your question?

Yes. Thanks so much.

This is Ning. I'd like to add that our business model is quite differentiated. We have a credit-type business, and we also have insurance and wealth management business, which is a significant part of our revenue and value. My sense is it’s much safer as a business model. We talked about like the regulatory uncertainty and so on. My view is the monoline business is very risky in such an uncertain environment. But you can think of us as a kind of three pillars, much more stable. Each business line represents a substantial market opportunity, growing very fast with high quality. That really differentiates our strategy. We're not pursuing these three things just for the sake of doing more; it’s because there’s a strong synergy among the businesses, between credit-tech and wealth management and insurance. So as I highlighted in the first part of my presentation, this synergy is becoming more evident. All that contributes to lower customer acquisition costs and higher LTV. That’s how my colleagues and I view our business. Thank you.

Thanks very much, Ning, for those comprehensive insights. One more question is about our funding strategy as we shift to lower APR. What would be our funding sources?

Na, please.

Okay, sorry. Yes, I think, as we mentioned, I believe with our client quality improvements at 24%, we think there is still significant space for our funding to decrease. In 2021, our main funding partners included banks, trusts, microfinance companies, and financial leasing companies. We expect to build more relationships with our funding partners and we anticipate getting about 1% or 2% reduction in our funding costs.

Thanks very much. That's all from my side. Thanks.

Thank you. As there are no further questions at this point in time, this concludes our conference for today. Thank you all for participating. You may all disconnect now. Thank you everybody for joining.

Thank you.

Thank you.