Yiren Digital Ltd. Q4 FY2022 Earnings Call

Thank you, operator. Good morning, and good evening, everyone. Today's call features the presentation by the Founder, Chairman and CEO of CreditEase, our CEO, Ms. Ning Tang; and our CFO, Ms. Na Mei, our SVP, Ms. Mei Zhao; meanwhile our SVP, Mr. Shao Shan and Yiren Select, Mr. Raymond Fang; our Head of Consumer Finance business will join the presenters in the Q&A session. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provision of 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 future 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 the relevant rules. 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 the U.S. GAAP. For information about those non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it to Ning for opening remarks.

Thank you all for joining our conference call today. We are pleased to deliver an impressive quarter with robust growth in both revenue and profitability, marking the full success of our business restructuring and product optimization despite the volatility of the external environment amid the COVID resurgence. Now as the macro economy starts to recover post-COVID and the industry is heading in a more positive direction, we are looking forward to accelerated growth in our business. First, an update on our holistic wealth business. As we previously projected, our insurance brokerage business continued its strong momentum in the fourth quarter of 2022. Total premiums reached more than RMB 1.3 billion, representing a 34% increase quarter-over-quarter and over 50% growth year-on-year. For the full year of 2022, our total premium increased by 61% to approximately RMB 4 billion, significantly outperforming the industry average of 4.6% annual growth rate. What's behind this rapid growth is our strategy in product innovation and customization as well as operational upgrades. On product innovation, Hexiang has been strengthening cooperation with corporate partners and insurers, making great efforts to better serve individual and institutional clients through a growing number of diversified products. For example, in order to meet our clients' needs for better financial protection as well as higher investment returns, we started to work with the only mutual life insurance company in China and launched three tailor-made products for our high-net-worth clients months ago, which are rarely seen in the Chinese market with limited penetration. The products have proven to be an immediate success right after our launch. In the fourth quarter alone, those three products contributed more than RMB 200 million in premium, and that number is still growing. Also, as for our customized exclusive whole-life insurance product, that we mentioned last quarter, the premium saw a quarterly increase of 68% to close to RMB 100 million, reflecting its high popularity among our clients. Another example is from our property insurance products. As China's outbound investment and construction businesses expand at a fast pace, the demand for relevant insurance protection is on the rise. Leveraging our advantages in product development and the resources within our business ecosystem, Hexiang started to offer overseas construction insurance services in the third quarter of last year, which has brought in approximately RMB 40 million in premium with large ticket size policies as of the end of last year, and is expected to continue solid growth in 2023. As of December 31, 2022, Hexiang insurance brokers had established approximately 40 offline branches nationwide and offered over 840 insurance products from more than 100 insurers. Some of our well-known partners include Taikang Life Insurance, AIA, and AVIVA, just to name a few. Moreover, on operational upgrades, we have been improving our service quality and building up our elite agent team since last year. Currently, 10% of our agents in Hexiang are members of the MDR team, an independent association of the world's leading life insurance and financial services professionals. And the proportion is much higher than the industry average of 0.2% in China. In October and November last year, the financial regulators issued new rules on the life insurance industry, including a regulated cap on commission fee rates and investment returns. The actual impact on our business is manageable, and we have already optimized our product offerings in response to the regulatory directions to ensure 100% compliance. Due to the product mix adjustment, our revenue generated from the insurance business in the fourth quarter showed slower growth compared to the quick ramp-up of our premiums. We believe that the new regulation benefits us in the market competition, given Hexiang's reach and diversified product lines that cover both life and property insurance and both B2B and B2C businesses. Now moving on to our Super App wealth platform, Yiren Select. In order to better serve our mass affluent clients in a comprehensive manner, Yiren Select has focused on providing customized products and services in the areas of health care and beauty, education and study, and lifestyle, which enhanced our client engagement and helped drive up our new client acquisition efficiencies. In 2022, the number of clients who made a transaction on Yiren Select or through our institutional partners saw an increase of 88% year-on-year. Looking into our holistic wealth business, total client assets reached more than RMB 23 billion as of December 31, 2022, representing an increase of 21% compared to the end of 2021. Going forward, we expect to continue our high-quality growth with competitive profitability as we continue to optimize our products and operations, focusing more efforts on our core business with higher value and seizing new market opportunities. Meanwhile, as the synergies within Yiren Digital's different business lines keep growing, operational efficiencies are expected to further improve. With the macro economy recovering and domestic consumption rebounding, we expect healthier business expansion in 2023. Now I will pass it to Mei, who will go through the highlights of our credit tech business for the fourth quarter.

Thanks, Ning, and hello, everyone. Now I will give you an update on our Credit-Tech business. In the fourth quarter of 2022, our total loan volume reached RMB 6.8 billion, representing an 8% increase quarter-over-quarter despite the COVID resurgence and the peak inflection post-reopening in November and December. The momentum is mainly driven by our consumer loan business, particularly our revolving loan product, Yi Xiang Hua. In this quarter, our small revolving loan accounted for close to 80% of our total loan volume compared to 65% in the same period of 2021, reflecting a significant transition of our product mix upon the completion of the business restructuring. Loan facilitation of our small revolving loan products reached RMB 5.3 billion this quarter, showing a 15% quarterly increase and 32% annual growth. As our domestic consumption starts to recover, we expect this momentum to continue in the coming quarters. One highlight I would like to mention regarding this record of growth is our strategy to optimize customer acquisition and traffic operations. Instead of relying on our traffic platform partners, we have been expanding our own traffic channels and consistently accumulating our traffic tools. In our fourth quarter of 2022, nearly 90% of the new customer traffic came from our own channels, either via our social media platforms, application markets, or our online campaigns. Meanwhile, we have also set up a membership system with exclusive and diversified benefits to increase our customer stickiness and engagement. Through our continued efforts, the number of borrowers served in the fourth quarter enjoyed a 39% increase year-on-year, and MAU reached 2 million on our Yi Xiang Hua platform. Consequently, our acquisition cost per user shows a visible declining trend, translating into healthier unit economics. As for our SME loan business, we are being cautious with our risk control policies and proactively constraining growth to maintain the overall product mix and asset quality in line with the current macro situation. We note that a sizable proportion of our existing clients on Yi Xiang Hua platform are high-quality business owners with a good credit record. Therefore, we have started offering these customers fast track online loan facilitation services on Yi Xiang Hua since December last year, which has further helped to reduce our acquisition costs. We will adjust our product mix dynamically according to the recovery pace of business activities. On the funding front, as a number of our funding partners continue to grow and liquidity in the market improves, we expect a further decline in our funding costs in 2023. Lastly, regarding asset quality, due to the COVID situation, our delinquency rates displayed slight volatility in the fourth quarter with the FPP 30-plus delinquency rate reaching 0.67% before recovering to a historical low level in February 2023. Early indicators have shown that our asset quality continues to improve as our collection ratio increased and the borrowers' repayment capabilities recover. With that, I will now pass it on to Na, who will go through the financials for this quarter.

Thanks, Mei, and hello everyone. For the fourth quarter of 2022, we delivered a strong quarter with both top and bottom line, reliant on true digital growth and strong year-over-year performance. Now I will focus on key financial highlights, and please refer to our earnings release and IR deck for further details. In the fourth quarter of 2022, total revenue reached RMB 1.1 billion, representing a 29% increase quarter-over-quarter and a 7% increase year-over-year due to our rapid growth in scale. Revenue from holistic wealth management increased by 9% quarter over quarter to RMB 320 million, accounting for about 29% of our total revenue, presenting a balanced and stable revenue structure. On the quality side, total loan facilities for this quarter were RMB 6.8 billion, showing a 10% annual growth, driven by the diverse borrower base and strong demand for our smaller revolving loan product as Mei just touched on. Revenue from credit tech stores stood at RMB 339 million this quarter, increased by about 30% quarter-over-quarter and 4% year-over-year. To realize our mission of financial inclusion and in alignment with regulatory directives, our average borrowings are capped around 24%. It is the current momentum of our Credit-Tech business to facilitate further digital growth in loan issuance for 2023. Our overall trend shows a concrete decline quarter-by-quarter as we finish the business transition and continue to refine our cost structure. Our total operating cash was RMB 456 million this quarter, which decreased by 34% compared to the fourth quarter last year. Sales and marketing expense decreased by 56% to RMB 103 million from the same period last year due to our optimization of our offline business and the improvement of our acquisition efficiency. Origination and service other operating costs decreased by 2% year-over-year to RMB 212 million, which largely remained stable. G&A has decreased by 29% year-over-year to RMB 85 million as we continue to enhance our Yiren Digital operations and benefit from cost savings across our departments. Despite some increases in our contract assets receivable and other accounts, due to the reorganization of our product mix, we've recorded only a 7% year-over-year growth in these areas to RMB 59 million. Turning to our bottom line, we delivered a strong profit of RMB 485 million this quarter, representing a significant increase of 47% year-over-year and 18% quarter-over-quarter. For the full year 2022, total net profit reached RMB 1.2 billion, reflecting an increase despite the expenses incurred from managing our offline business lines. Net profit margin climbed to 35% in 2022 from 23% in 2021, showcasing our efforts to optimize our unit income through business transitions and cost control. Regarding our balance sheet, we maintain a substantial balance with RMB 6 million in total shareholder equity as of December 31, 2022, which is an increase of 25% compared to December 31, 2021. Moreover, our capitalization grew stronger, with cash reserves now totaling RMB 5.2 billion, representing a solid foundation for expansion opportunities in the future. Looking forward, based on our business size and market conditions, we expect our full-year revenue for 2023 to stand between RMB 3.6 billion to RMB 4 billion, with net profit margins expected to remain stable. This is the company's current and preliminary view, which may be subject to change and uncertainty. With that, we conclude our closing remarks. Operator, we are now open for questions. Thank you.

Our first question today comes from Matthew Larson from Vancadia.

Okay. Good quarter, as you've been doing very well over the last two years. Got a couple of questions. You've reiterated in previous conference calls the intention to buy back up to $20 million worth of stock, but I don't see a reduction in the outstanding share count. Have you bought back any stock yet based on your goal to do so?

Yes. Okay. I will answer your question about our share buyback. Yes, as we mentioned in our last preliminary call, we will perform our shares buyback. And after the conference, we will proceed. Until now, we have used about $400 million to perform our share buyback, and we will continue to do so in this opening window. Hope my response answers your question.

Yes, I'm missing coming here. So you did buy back shares since last quarter?

Yes.

You did. All right. And you said RMB 400 million or—that would be about $5 million or $6 million. I'm sorry. Can you just—how many shares did you buy back? I guess, is a better question?

Okay. Totally, we used about $400 million to $500 million to do our share buyback. And for the detailed number of the shares, we can certainly provide later.

Okay. I guess I'm misunderstanding you because I'm looking at the share count—shares outstanding.

I'm sorry, I'll correct my number. Our USD is now $400 million; it's $4 million.

$4 million. Okay. So you bought back about 2 million shares or so; you bought back $4 million of the 20 million that you planned to.

Yes. Your book value must be above $9 now, and you have a lot of cash. What sort of interest have you been earning on the cash? I haven't really looked over the quarter—I just looked at the news release. With interest rates higher, most places around the world, that could be a very good source of income. What sort of return are you getting on that cash? Yes, we have strong cash deposits. We use our cash to perform our share buyback. Now, considering risk and liquidity purposes, our bank deposits yield about 3% to 4% annually. Of course, as you mentioned, we have a strong cash position, and we also want to use our cash efficiently to seize any new business opportunities and hope to achieve higher income rates on our deposits.

Okay. So you're getting 3% to 4%, which is very good on the amount that you have plus. It was a very good quarter. So congratulations. Your stock remains extremely undervalued by any measure slightly—it’s 1x cash flow from what I can see and a little over 1x earnings. What plans do you have to generate greater recognition for your company so that you could generate greater investor interest in it? Have you thought about getting some research coverage or some public relations people to help share how well you're doing? If you could address that, I appreciate it.

Yes. Thank you for your projection. Yes, we will try to attract more investors to recognize our contributions and understand our market value. Thank you.

We'll talk more with the analysts and the investor community.

Okay.

We'll try to do better, obviously.

Yes. Okay. I mean I do remember, frankly, I remember when you went public through Morgan Stanley back in December of 2015, and I bought on the IPO. And of course, your stock was quite a bit higher over the years before some of the regulatory changes affected the peer-to-peer lending business that was not recognized. You've been able to pivot quite well, making your business much more diversified, not just loans but also insurance and wealth management. You’re doing a very good job. It would be nice to see the stock reflect that. I think it should be worth several times where it is. It would be worthwhile to try and get some research coverage or attend some conferences to raise your company's profile.

Thank you again for your trust many years ago and today. And with COVID behind us, we will do more traveling to engage with investors, yes indeed.

We have an additional question from Ethan Yu at First Trust China.

Congratulations on your outstanding quarterly performance, especially with your strong margins. Thanks for the previous investor—the answer to my question is about the repurchase program. I have another question regarding how your overseas business development is progressing.

Is that regarding our overseas business development?

Yes, your overseas business development.

Yes. Last quarter, we started our business in Southeast Asia, specifically in the Philippines. It's in the early stages of operations, but we see it becoming a larger portion of our Credit-Tech business revenue. Yes, and we will expand from the Philippines to other countries, other markets in Southeast Asia and potentially other parts of the world, leveraging our fintech capabilities established in our home market. Yes, it's still in early days, but we are optimistic that it will become a key part of our business and is very strategic for us to expand this capability. Yes, we are now in the Philippines, and we launched our first initiative last quarter there.

And ladies and gentlemen, in showing no additional questions, we'll conclude today's question-and-answer session as well as today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.

Thank you.

Thank you.