Yiren Digital Ltd. Q3 FY2023 Earnings Call

Thank you for standing by and welcome to the Yiren Digital Third Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I would now like to hand the conference over to Ms. Lydia Yu, Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our third quarter 2023 earnings conference call. Today's call features prepared remarks by the Founder, Chairman, and CEO of CreditEase, Ning Tang, and our CFO, Ms. Na Mei. Our SVP, Ms. Mei Zhao, 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 the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company 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 obligations to update any forward-looking statements as required under the relevant 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 replacement for the financial information prepared and presented in accordance with 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 on to Ning, our CEO, for opening remarks.

Thank you, Lydia. Hi, everyone. Thank you all for joining our earnings conference call today. As China transitions into the post-COVID era, recent macroeconomic data shows economic recovery gaining traction, with China reaching 4.9% year-over-year GDP growth in the third quarter, beating market expectations, but still a decline on a year-over-year basis from the previous quarter. In the face of overarching challenges on the macroeconomic front, we have consistently directed our investments toward research and development, aiming to elevate customer experience and optimize operational efficiency. As a result, over the past few quarters, we have enhanced the quality of our earnings with consistent improvement in our bottom line quarter-over-quarter. Our strategic approach positions us to capitalize on growth opportunities once the economy rebounds. We reviewed our new corporate positioning as an AI and technology-driven financial and lifestyle services platform that is anchored by three key pillars: financial services, insurance, and consumption and lifestyle services. This quarter, we have started utilizing AI-assisted marketing tools to increase our advertising targeting accuracy and achieve greater social media visibility. We are also in the process of upgrading our chatbots to assist in the early stages of the loan collection process. Let's get into this quarter's business update. First, on financial services. In the third quarter of 2023, total loan volume was RMB9.8 billion, representing a 56% increase year-over-year. The total number of borrowers in the quarter increased 63% from the prior year. We have seen 1.2 million views on our Yi Xiang Hua APP, which continue to increase for the sixth consecutive quarter, rising by 23% from the prior quarter to 2.9 million. The average transactions per user maintained stable at three times, indicating high user stickiness and activeness. In terms of user distribution for Yi Xiang Hua, approximately 30% are first-time borrowers, while the remaining 70% are repeat borrowers. Borrower acquisition continues to explore new acquisition channels and optimize our acquisition methods to attract high-quality new customers. During this quarter, we experimented with utilizing our WeChat platform. Additionally, we initiated collaboration with selected media partners to fine-tune our acquisition model and enhance the accuracy of user targeting. Combined with utilizing AI-assisted marketing tools, these new initiatives resulted in loans facilitated to new borrowers increasing by 49% this quarter from the prior quarter. Our international expansion efforts have experienced significant growth in the Philippines market, with our third quarter results showing a remarkable increase of 172% compared to the previous quarter. We have also achieved notable improvement in risk management as we continue to adjust and fine-tune our risk models tailored for the local market. We continue to pursue growth in international markets and are excited for this strategy as a substantial driver for future growth. On our funding front, we continue to diversify our funding sources. We have noted approximately a 5% decrease in institutional funding costs this quarter as compared to the last quarter. Asset quality remains stable, with 15 to 89 days delinquency rates at 3% and collections rates improved by 0.5 percentage points this quarter. Our consumption and lifestyle services have seen continuous rapid growth over the past few quarters, with total GMV generated this quarter increasing 42% from the prior quarter to RMB563 million. The total number of active users this quarter also increased 22% from the prior quarter to 2.96 million. The growth in our consumption and lifestyle services segment has also created synergies with our financial services segment, with active users further stimulating an increase in loan demand, resulting in a mutually reinforcing loop in our ecosystem. Lastly, in our insurance brokerage business, gross premiums reached RMB1.4 billion for the third quarter of 2023, up 43% year-over-year and 7% quarter-over-quarter, which is significantly ahead of the industry average. The second quarter was the peak for first-year premiums due to the timing of the new pricing regulation capping future product returns at 3%. Breaking down this quarter, 62% of total premiums were attributed to life insurance premiums, while property insurance premiums accounted for the remaining 38%.

Our business volume expands. Research and development expenses increased 17% year-over-year to RMB39 million in line with our AI and tech innovation across our company. Origination and service costs increased 10% year-over-year to RMB245 million, mainly driven by an increase in service costs related to our insurance brokerage segment. G&A decreased 30% year-over-year to RMB54 million as we continue to realize operating efficiency. The allowance for contract assets and receivables was RMB84 million for this quarter, remaining stable and above 0.9% of loan facility. On to our bottom line, we continue to deliver a strong profit of RMB554 million this quarter, increased 105% from the prior year. We generated about RMB645 million net cash from operations in this quarter, an increase of 88% from the prior year. On the balance sheet side, our balance sheet remains strong with total cash and cash equivalents of RMB5.4 billion by the end of this quarter. This quarter, we deployed $2 million to repurchase our shares in the public market. As of the third quarter end, the company has accumulated $5.5 million for our share repurchase program. We maintain confidence in the fundamental aspect of our company's business and growth prospects. Based on assessment of our business and market conditions, we expect our 2023 full-year revenue to stand between RMB4.3 billion to RMB4.9 billion, with net profit margin expected to remain stable. This sentiment reflects our current evaluation and preliminary review, subject to changes and uncertainty. With that, we conclude our closing remarks. Operator, now we can open for questions. Thank you.

Thank you. The first question comes from the line of Matthew Larson. Please go ahead.

Good evening. Thanks for taking the call. I missed most of the conference call, but I read the report. Another great quarter, I mean, it's really unprecedented, the sort of financial returns you show on a quarterly basis. Your stock has gone up pretty sharply the last two days in advance of this call. But what are your plans to try and get a higher level of stock price? Because based on your run rate, you're trading at less than 1 times earnings, which is, in my 41-year career, pretty much unprecedented. In addition, you have probably at least 3 times the cash on the balance sheet that the value of your company is. And that's also unprecedented. Your company also used to be worth $50 a share like a few years ago. So down at the $2 or $3 range is unusual. But you're a Chinese stock from the PRC and people are just distrustful. With that being said, what plans do you have to broaden out investor awareness of your company? Because this stock should be $10 minimum, not $2. Can you help me with that?

Well, thank you. I'll provide my perspective, and then Na and other colleagues can do more. And so, first of all, thank you for your kind remarks and recognition. One point is that, as Na mentioned, we keep buying back our shares. And now we see the volume has gone up, which enables us to buy more shares. So we will continue to do that as much as we can. And so that's one. I hope there is a reinforcing positive loop. A stock price goes up, more room for buyback, and the price goes up further, creating more room for buyback and so on. So that is one. Secondly, quite interestingly, I've had some interactions with investors and other interested parties about the same issue. There are some suggestions which I found to be quite intriguing and probably make good sense. I would love to get your thoughts as well, which is that when our market cap was much bigger, we attracted a lot of institutional interest. But now, today the interest is more at the retail level. So if we keep doing institutional communication mainly or solely, that is not good enough. We miss a big chunk of our investor interest. Therefore, we are thinking quite proactively to do more retail side communications. There is good work to be done on that front while continuing to do better communication with institutional investors and other interested parties. However, with more visibility like we have, we are enjoying, our business is getting better and better, consistency is clear, and prospects are great. So there will be more institutional investors coming back, while the retail side is something we will spend a lot of time on. So that's another point I'd like to make. Fundamentally, we will continue to do great business. My firm belief is that if we continue to deliver, things will come back to us.

All right. That all sounds good. I know your share buyback is restricted by the volume. How many shares have you bought back this year? You were going to buy $20 million worth, but that's pretty tough to do given the volume. Can you tell me how much you've bought back so far?

Na, you mentioned this number, so please go into more detail.

Yeah, as I mentioned in my script, by the third quarter end, we have accumulated about $5.5 million. Actually, as of the end of this month, the latest amount is around $7 million to perform our share buyback, and we will continue to aim for $20 million.

I apologize for missing the beginning of the call. It took me some time to join. You mentioned $7 million, which is acceptable. Have you considered tendering, say at $4 for about 25% of the shares? This leads to my second question: why not just take the company private? You have sufficient cash on the balance sheet and are generating more earnings than the company's total market value. Trading at less than one times earnings is quite rare. What's the rationale for remaining a public company? It seems like a better option to go private and offer a premium, let's say $5, to shareholders who would likely appreciate the opportunity to exit. This would require less than what you currently have in cash. Have you ever been approached by any third parties interested in participating in a buyout?

Yes, we certainly see the math, but as I explained in previous calls, it's very clear that our strategy is to go global, to become a global FinTech leader. Maintaining this public company position gives us a lot of opportunities to operate globally. Also, we believe the market will recognize good performance and consistent good performance.

So are you saying that having a US-listed stock has certain prestige attached to it? So you would rather be a publicly traded company because you think in the long run it'll benefit you?

Yes, for example, we can do acquisitions globally. We can reward our employees and partners globally with stock and so on. So it's very strategic that we have this vehicle, this platform.

All right, but it wouldn't make sense to pay people in stock when your stock is still undervalued. You might as well pay cash because you have plenty of cash. So if you're going to reward people with cash…

I’m talking about the future.

Okay, very well. Listen, you're not the only company in your space. I like your company because you've expanded your business model to include insurance and other aspects. However, there are other companies that are purely lending platforms, like QFIN or FINB, FinVolution, which we reported on last night. Another company is reporting tomorrow, which is X Financial. I'm familiar with all these companies because I used to work at Morgan Stanley and we underwrote you guys. We were part of your initial public offering back in 2016 and 2015, so I know your companies well. I've been frustrated that I haven't made as much money as I'd like because I've had to be patient. But that's all there is to say. Your stock should be valued much higher. As you buy as many shares as the volume allows, that's all I can ask. When does your window open for buying more shares? The volume has spiked in the last couple of days. When can you purchase more shares after this earnings call?

Yeah, once the window opens up, we will continue with our buyback strategy.

When does that window open up, sir?

I will answer your question. After the completion of this conference call and the release of the earnings statement for the third quarter, the window is open.

Okay, last question. Some of your competitors do pay a dividend. Some of them, which is QFIN is the symbol, do pay dividends, which not only returns some of your huge cash position to shareholders, but it makes shareholders more comfortable dealing with a company from the PRC that pays dividends because if you pay dividends, then the money you have is actually there. So, have you considered that?

We have thought about that. As a matter of fact we did it a while ago for a short period. There are different schools of thought. People say that, what you just said is one school, and some people, which I tend to agree more with, say that once you pay dividends, you become a category of dividend-paying companies as opposed to high-growth companies. If you are a high-growth company, which we are, we have great growth opportunities for our cash. Therefore, we should belong to that category. I firmly believe we are showcasing high growth and high-quality growth, AI-driven growth. So, yes, I understand dividends help in terms of returning money to investors. So we do buybacks aggressively, and that's another way of generating value for investors while still focusing on being a high-growth company and putting cash to better use. That's our current thinking.

The buybacks are effective, but the stock price hasn’t increased much. Consider this: a few companies that went public around five or six years ago, which were once peer-to-peer lenders like you, are now in the same industry and pay dividends. One example is FinVolution, which has a price-to-earnings ratio of 4.5 and offers a 4% dividend. Another is Qifu, followed by Morgan Stanley, with a $3 billion market cap and a 5 times earnings ratio, also paying dividends. Simply paying a dividend could potentially enhance your stock's price-to-earnings multiple by 3, 4, or even 5 times. This means your stock could significantly rise with just a small dividend. Many investors prefer stocks that pay dividends, as it assures them that your business has sufficient cash, since dividends can only be paid if there’s money available. Thus, your stock’s value could double or triple just by implementing a dividend. That’s my suggestion.

Thank you. Noted. We'll study further.

Very well. Thank you for your time.

Thank you. This concludes our conference for today. Thank you for your participation. You may now disconnect.

Thank you all.