Yiren Digital Ltd. Q2 FY2023 Earnings Call

Thank you for being here, and welcome to the Yiren Digital Second Quarter 2023 Earnings Conference Call. All participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. Today's conference call is being recorded. I would now like to hand the call over to Lydia Yu from Investor Relations. Please proceed, ma'am.

Thanks. Hello, everyone, and welcome to our Second Quarter 2023 Earnings Conference Call. Today's call features prepared remarks by the Founder, Chairman, and CEO of CreditEase and our CEO, Ning Tang, and our CFO, Ms. Na Mei. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding future risks, uncertainties, or factors is included in our filings with the U.S. SEC. We do not undertake any obligation to update any forward-looking statements as required under development laws. During this 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 these non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it on to Ning, our CEO, for opening remarks.

Thank you all for joining our earnings conference call today. Before I jump into business updates for the quarter, I would like to first review our new corporate positioning as an AI and technology-driven financial and lifestyle services platform. Our new positioning better aligns with our business model that is anchored by three key pillars: financial services, insurance, and consumption and lifestyle services, with underlying business strategies and operational flows driven by AI technologies. The company's AI lab, which was officially established last quarter, will focus on utilizing large language models and generative AI technologies to build and develop new products and applications that will work across our business lines. A few examples of what we are working on include a customized virtual AI customer service agent that will be available to respond to customer inquiries 24/7, as well as AI-assisted marketing tools and AI productivity tools to enhance our productivity. I will continue to share more details and progress about AI during future earnings conference calls. Next, I will update you first on our insurance brokerage business. Total gross premiums reached more than RMB 1.3 billion in the Second Quarter of 2023, up 67% year-over-year, of which life insurance policies increased 162% year-over-year. The spike in life insurance policy sales this quarter was mainly driven by the timing of the new regulation that requires life insurance companies to lower their pricing interest rate of newly developed products from 3.5% to 3% and to discontinue selling all products above a 3% interest rate. As we continue to invest in product innovation and customization, as well as agent development and digitization, we noted three key successes this quarter. Average first-year premiums increased 15% quarter-over-quarter. The number of life insurance policy premiums exceeding RMB 3 million increased 206% quarter-over-quarter, and average productivity of our agents grew by 328%. On property insurance, as mentioned on our last call, reinsurance for overseas construction policies is a new key market we are focusing on, and the total premium for this product segment continued to grow at a fast pace, increasing 77% quarter-over-quarter. Next, on Financial Services. In the Second Quarter of 2023, total loan volume was RMB 8.2 billion, representing a 65% increase year-over-year. The total number of borrowers in the quarter increased 82% from the prior year to 1.01 million on Yi Xiang Hua, which continues to be our fastest-growing loan product. The monthly active user number on our Yi Xiang Hua APP continues to increase 11% from the prior quarter to RMB 2.4 million, and the number of average transactions per user increased to 3.2x this quarter, up from 2.1x from the Second Quarter of 2022, indicating a significant increase in loan-to-value over tech ratio per borrower. Last quarter, I mentioned that we have started expanding internationally, in which we hope to leverage our expertise in the consumer finance sector to promote greater financial inclusion worldwide. We launched in the Philippines last quarter under the brand Easy Peso and have seen rapid growth as our team continued to enhance local operational flows and refine our risk models. We have seen a continued improvement in margins. With initial success achieved in the Philippines, we have also started evaluating other regions and expect to expand to one to two new countries in the near future. On the funding cost front, as we continue to diversify our funding sources, we noted a 7% decrease in institutional funding costs in June compared to the beginning of the year. On asset quality, delinquencies remained stable with a 15 to 89 days delinquency rate at 2.9% compared to 3.0% last quarter. On consumption and lifestyle services, total GMV generated this quarter increased 28% from the prior quarter to RMB 396 million. The total number of paying members this quarter increased 57% from the prior quarter to 2.44 million. To conclude, I want to express that I am very proud of our team for everything we've accomplished so far. It's been a challenging few years, but I am quite optimistic about the road ahead and grateful to you all for being on this journey with us. With that, I'll now pass it to Na, who will go through the financials for this quarter.

Hello, everyone. On this call, I will only focus on our key financial highlights. Please refer to our earnings release and IR deck for further details. In the Second Quarter of this year, total revenue reached RMB 1.3 billion, representing a 55% increase year-over-year and a 34% increase from the prior quarter, showing strong financial performance despite a somewhat more challenged macroeconomic environment this quarter. On financial services, we continue to see strong demand for our loan products, with total loan facilities this quarter reaching RMB 8.2 billion, representing 27% growth over the prior quarter, compared to analysts' projections of single-digit growth. Our insurance gross written premiums reached RMB 1.3 billion, representing a 57% increase year-over-year and a 54% increase from the prior quarter, driven by strong life insurance policy sales. Revenue for insurance brokerage reached RMB 404.7 million for the quarter, increasing 115% year-over-year and representing 31% of total net revenue. Regarding Yiren Select services, total GMV for the quarter reached RMB 396 million, increased 28% from the prior quarter. On the other side, sales and marketing expenses increased 40% to RMB 149 million from last quarter, mainly due to our startup investment in brand and marketing this quarter to drive our further growth. Origination, servicing, and other operating costs increased by 73% from the prior quarter to RMB 346 million, primarily driven by increases in general and sales costs related to our insurance sector. However, our insurance sector expenses as a percentage of revenue have remained relatively stable at around 17%. General and administrative expenses decreased by 5% quarter-over-quarter to RMB 97 million. The allowance for contracts and receivables was RMB 51 million for this quarter, remaining stable at 0.7% of our total loan facility. In summary, we continue to deliver a strong profit of RMB 427 million this quarter, an increase of 24% quarter-over-quarter. We generated RMB 780 million net cash from operating activities in this quarter, an increase of 84% from the prior quarter. Total cash and cash equivalents stood at RMB 5.8 billion by the end of this quarter. Early in June, we announced the acquisition of a licensed financial guarantee company in China, which will enable us to provide more comprehensive financial services and continue to grow our credit business segment as well as other business models. Going forward, we will continue to seek out opportunities for new initiatives and strategic investments to foster business growth. We generally remain confident in our company's business fundamentals and growth opportunities. Therefore, we continue to execute our share repurchase program. This quarter, we deployed close to USD 1 million to buy back shares in the open market. As of June 30, 2023, the company has accumulated around USD 3.5 million for our buyback program. Based on preliminary assessments of business conditions and market trends, the company projects total revenue in the Third Quarter of this year to be between RMB 0.9 billion to RMB 1.1 billion, with net profit margin expected to remain stable. With that, we conclude our closing remarks. Operator, we'll now open up for questions.

The first question comes from Andrew Lean, Private Investor.

My question is regarding the 50% ownership of the company. It appears you want the stock price to rise, but currently, the trading volume is very low. Share buybacks are quite challenging with this volume. Would you consider instituting a dividend similar to what others have done? This would also help legitimize the company. Additionally, I would like to discuss your auditing process. Can you provide insights into the validity of your figures, especially since it took three auditors over a year to finalize the latest financial statements? The company appears to be very strong on paper, showing around $800 million in cash and a current market cap of $200 million, so I am quite interested in understanding the authenticity of these numbers and the reasons for the delays.

Na will address the auditing question, and I will respond to the first question. We do not plan to delist the company, as being a leading global impact company is a key part of our strategy. We view digital as central to this initiative. Current geopolitical issues and the unstable market conditions in fintech over the past few years have impacted valuations, not just for us but for others in the industry as well. We have been focusing on strengthening our business fundamentals and improving our communication with the market about our strategy and operations. A few years ago, we were a market leader, and we are hopeful and confident that through hard and smart work, we can reclaim that position. We also have a substantial cash reserve that will enable us to invest in future opportunities, including AI and global expansion. We are entering new markets, which I believe is a promising direction. AI will play a significant role, and my hope is that in three years, we will have transformed into a new global impact leader.

Could you comment on the dividend policy? If possible, please share your thoughts on a potential dividend, considering that Tech has recently seen growth in stock price and volumes, and is 50% owned by the CEO.

Yes. Yes, I've been speaking, yes. And this is me and we currently have no such dividend policy. Yes, we keep evaluating different possibilities and different strategies. But currently, our view is that, yes, this strong cash position can help us stand off any potential uncertain challenges and also invest for the future.

Okay. But if you want your stock price to increase, couldn't you consider like the discount to value is very high? Buybacks are out of the question. Also, another idea would be X Financial XYF. They bought back shares; they repurchased shares directly from employees that have stock. Maybe you could consider that in increasing the daily trading volume in order to move the needle of the stock price and also the volume? So buying from employees, could you consider that?

To be honest, we are also disappointed that we haven't been able to really deliver value regarding share price. That's why I just said that we will try and do a much better job communicating with the market, yes, to stakeholders. But regarding employee shares, I believe our team members love to enjoy the upside with the company, and they also deserve it. So I very much want them to enjoy the upside as opposed to buying shares from them after this low valuation.

Okay. Let's think again about introducing the dividend policy perhaps in the next quarters. Consider a company that implemented a similar dividend policy, which resulted in a significant increase in stock price and volume; the company is in a much healthier position now after announcing a substantial 30% dividend yield over six months. So they are currently paying 6% now and will pay another 6% in six months, or they've already paid 6%. This situation is, in my opinion, similar to YRD.

Thank you for your suggestion.

This is Lydia from Investor Relations. Regarding your second question, could I first clarify something? Your inquiry is about auditing. I want to note that we released our annual report this year in April, which is consistent with expectations. I just wanted to clarify what you meant in your update request.

Then that was resolved. It was just the change from KPMG.

The financial report was delayed just because there was no auditor. So it took some time for the new auditors to finalize the numbers. But for our 2022 annual report, it was released on April 28 this year.

The next question comes from Matthew Larson with National Securities Corporation.

Hello. A couple of things. On the subject of the buybacks, I got cut off and had to call back. So maybe you mentioned it. You are scheduled to buy back $20 million worth of stock this year. Your volume is constrained to a certain degree. But the volume over the last two months has averaged considerably higher than the first six months this year. What are the restrictions as far as you have when it comes to the amount of shares you can buy back on a daily or weekly basis with percentage?

Can Na please answer that question regarding buybacks.

Yes, I will answer this question. As you mentioned, we put forward our buyback plan. We have to follow the restrictions on our share repurchase amount. Essentially, the limit on the buyback amount the company can implement is typically 50% of the average daily trading volume. Therefore, we comply with the rules regarding 20% of the total market value.

And if you could tell me how much you have bought back year-to-date of the $20 million that was announced before the year started.

Yes, as I mentioned, we announced that the new share purchase buyback program last year, and as mentioned in my script, as of June 30 this year, the accumulated amount is USD 3.5 million, and the latest amount by today is about USD 5 million for your revenue.

You've been a significant buyer, but it will be challenging to reach your $20 million target unless you increase the volume. I've been a long-term investor with your company, and I've joined this conference call several times. I participated in your IPO at Morgan Stanley in December 2015 when you were a peer-to-peer lender, and your stock peaked at $50 when regulation was less stringent in the PRC. You've transformed your business, shifting focus from lending to insurance and financial services, despite still holding about $1 billion in loans. Do you retain any of those loans on your books given your $800 million cash reserve? Regulators prefer that approach, as it's what banks do, and it is beneficial for your capital-light strategy from a risk perspective. Retaining more loans could help satisfy regulators. Can you clarify this for me?

I would answer your question. You have to mention we have a big cash balance in our finance payments. So actually, we have also used our own funding to service our clients. We have competed with other companies in this year. And by now, they have $600 million; we have cooperated with the trust to improve our quality, and we also have our own financial license company. As I mentioned in June, we also acted as a financial guarantee company. The financial guarantee company can also service our clients and also allows us to compete with other funding partners. In cooperation with other companies, our company can provide direct guarantees to our customers, which will also enhance our cash balance. Yes, of course, we will still keep our company to cooperate with other financial companies to utilize our cash balance to enhance our business development.

Okay, I have a couple more questions. The earlier caller mentioned the stock price, which I frequently think about. Your current trading valuation is less than 1x forward earnings, and you trade at about a quarter of your cash balance. Such valuations are rarely found outside of Chinese stocks. There are companies trading below cash levels due to the current disillusionment with investments in China. However, I believe this can change and I trust in mean reversion, but many investors remain skeptical of these valuations. The previous caller inquired about your auditors, but you're not the only one facing this issue. Many companies trade below cash, but you're different because you're experiencing significant earnings growth and expanding your user base. In your news release, you mentioned AI multiple times. It seems to me that your company and other fintech firms have leveraged AI in their operations for years, particularly in how you assess customer creditworthiness through quick algorithmic evaluations. This is something you should emphasize more. Your news releases are quite limited; the last major one I noticed was regarding your acquisition of Chongqing Jintong Guarantee Finance. However, it lacked clarity on its potential impact or whether it would be accretive. You should consider issuing more press releases highlighting your AI capabilities, as you've always been an AI-driven company and ought to be valued similarly to others in the space. One problem is that many people are unaware of your company. During these calls, I'm often the only one present, or there may be one other person; you lack research coverage despite having previously attracted attention from firms like Credit Suisse and Morgan Stanley, who dropped coverage when your stock price fell too low. Additionally, the earlier caller mentioned another company, XYF, which trades at a higher price and was underwritten by Morgan Stanley as well. While they no longer follow that company, it enjoys a higher valuation. The market leader in fintech for consumer finance, QFIN, trades at about 5x earnings, whereas you're at significantly lower multiples. If you're interested in boosting your stock price—something I assume you are, especially given how it used to be at 20x—it's imperative that you hire a public relations firm to tell your story to investors. Many low-priced stocks, including those from China, can double or triple in a day on minimal news. Yet here you are, reporting a strong quarter and growth across almost all business lines, and it doesn't seem to resonate. For patient shareholders, a modest upward trend in your stock would be appreciated. That's my strong recommendation. I think that's all I have for now. You really need to get your message out. Keep leveraging AI in your communications. Have you considered holding a roadshow? A gain of even $1 in your stock price would represent a significant percentage increase and would encourage investors like me to increase our positions. I currently hold a substantial stake, but as a financial adviser, I'm hesitant to invest more due to compliance limits on low-value stocks in client accounts. The best method to elevate your stock is to promote your achievements. Discuss your AI initiatives more. Regarding share buybacks, if you're limited by your broker or SEC rules, what about involving some insiders? Employees who wish to hold onto their stock but could potentially buy smaller quantities would capture attention. You need fresh ideas in PR. My son, who's 18 and active on social media, could help spread your story and potentially boost your stock's visibility. Your company is at least worth 4 or 5 times its current value, and even that would still be conservative as it would only represent 4x earnings. Why not aim for 10x earnings? With your cash reserves, wouldn't your employees and management want to see the stock rise tenfold? That seems like common sense to me. I hope you consider these suggestions, as well as those from other callers. Looking at your stock price, do you want to be a leader or remain unnoticed? I appreciate your strong performance, and that's all I wanted to share, but I hope to see some changes implemented.

Got it. You'll see more and more. Last time I heard you loud and clear. And now we have this AI initiative, yes, more and more. And yes, so I appreciate that we'll double and triple our marketing communications efforts, and I'll probably consider hiring your son.

We have a follow-up question from a private investor.

Hello. Building on what the other shareholders mentioned, I would like to suggest reinstating the dividend, even a modest 0.1 dividend could attract investors in much the same way a 5% dividend might. I'm not sure if you, Mr. Ning Tang, the CEO, are familiar with Yang, the CEO of another company, but they implemented a dividend that garnered significant attention, attracting investors and increasing their volume. I agree with everything the previous caller said and would also advocate for considering a dividend, as it could draw the interest of investors looking for dividend opportunities who might perceive your company as a deeply undervalued option. That's all I have to say, and I apologize for reiterating, but the previous caller did not mention the dividend.

Got it. We heard you. We will work on evaluating these and other possibilities.

This concludes the question-and-answer session as well as the call. Thank you for attending today's presentation. You may now disconnect your lines.

Thank you all very much for these constructive remarks and comments. We will work along these lines. Thank you.