Earnings Call Transcript - YRD Q3 2022

Keyao He, IR Officer

Thank you, operator. Good morning and 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. Our SVP, Ms. Mei Zhou; Raymond Fang, CEO of Yiren Select 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 on to Ning Tang for opening remarks.

Ning Tang, CEO

Hi, everyone. Thank you for being with us on our conference call today. We are happy to report a strong quarter with good business recovery and ongoing profitability improvements following our product restructuring and the pandemic impact earlier this year. As the macro environment continues to recover and our revenue model evolves, we are confident in our ability to pursue an accelerated growth trajectory in the upcoming quarters. First, I'd like to provide an update on our holistic wealth management business. Our insurance brokerage has maintained strong performance this quarter and has become a key revenue driver. In the third quarter of 2022, our total premiums reached RMB1 billion, reflecting a 36% year-over-year increase and significantly outpacing the industry average growth rate. Revenue from Hexiang Insurance brokerage services amounted to RMB189 million, accounting for over 22% of our total revenue, and we anticipate robust double-digit growth in the fourth quarter. The rapid growth of our insurance brokerage business is driven by Hexiang’s exceptional capabilities in product customization and innovation. Unlike other insurance brokers, Hexiang excels at understanding the unique needs of clients in various life and work scenarios, giving our products a distinct market advantage. For instance, one of our whole life insurance products, specifically designed for high-net-worth clients, generated nearly RMB 60 million in premiums this quarter. Additionally, our customized group insurance products for children and teens that include Vision Care Services will soon enter the market, expected to bring significant premiums in upcoming quarters. Furthermore, our property insurance products have experienced continued growth for 22 consecutive months, with strong demand as we expand into rapidly developing areas, including litigation preservation liability insurance. Another point to highlight is that the second-year renewal rate for our long-term insurance products reached 96.6% at the end of this quarter, significantly higher than the industry average of 85%, demonstrating the high quality of our services. As for the new regulations on online insurance sales that have been a major discussion within the industry this year, the impact on our business has been minimal due to our diverse product offerings and limited reliance on online channels. In the third quarter, we offered over 750 insurance products, an increase from around 650 in the previous quarter. Looking ahead, we expect to maintain strong momentum in both our life and property insurance segments. Now, to provide a broader perspective on our holistic wealth business. In the third quarter of 2022, total client assets reached RMB 22.8 billion, up 31% year-over-year, particularly driven by the Yiren Select platform, which is an enhanced version of Yiren Wealth under our Super App strategy. The average client assets held through our institutional partners crossed RMB 350,000, which represents a 36% year-over-year growth. As our live class finance initiatives gain traction, and with our balanced asset allocation investment education approach, the number of clients with assets exceeding RMB 1 million increased by 57% from the previous year, highlighting our improved service capabilities. Before I move on to the credit update, I want to mention that we officially closed our online brokerage arm, China Glory, in the fourth quarter last year to comply with new regulations. Moving forward, we will concentrate on our core wealth business lines and creating a strong flywheel effect that provides our loyal and growing member base with additional financial management solutions aligned with their investment, savings, and insurance protection needs, while also enhancing their lifetime value to us. Looking into 2023, we expect to see greater synergies across our business lines as Hexiang Insurance Brokerage continues to tailor products and services based on our customers' needs within the Yiren Digital ecosystem. Our customer base is also anticipated to grow with improved acquisition efficiencies as our consumption-driven businesses scale up, enhancing overall customer engagement. Now, I will hand it over to Mei to highlight our credit-tech business for the third quarter.

Mei Zhou, SVP

Thanks Ning Tang and hello everyone. Before I provide an update on our credit-tech business, I would like to reiterate our statistical product transition. We would like to see a full recovery of the growth pace post restructuring with the aim of improving our overall profitability and reducing potential operational risk amid the pandemic resurgence. We started to proactively optimize our loan portfolio structure back in the second half of last year, and to scale back our offline secure loans business that had higher operating costs and volatility during the pandemic. We officially terminated this product in the first quarter of this year. Now that our new loan portfolio enjoys higher operating efficiency and lower borrowing costs, we believe the transition allows us to better sustain and scale with the housing unit economics and higher flexibilities that lead into responding to any further market evolvement. In the third quarter of this year, our total loan volume reached RMB6.3 billion, accounting for 66% of total loans facilitated in the first half of this year and close to pre-restructuring levels. Given the current strong demand for our loan-facilitation services, especially for our small revolving loans, we project a further two-digit growth quarter-over-quarter in total loan volume in the fourth quarter this year. Another notable highlight is that our MAU increased to 1.7 million at the end of the third quarter this year, representing a 24% increase compared to the end of the last quarter, and a 54% growth compared to the end of the third quarter last year, due to our improved services and enhanced integration with our borrowers. Meanwhile, we see an increasing number of users coming back for a second loan, as we continue to offer various value-added services and membership benefits, such as discounts, tailored insurance products, and awards. In the third quarter of 2022, the repeat borrowers accounted for 81% of the total borrowers for small revolving loan products compared to 62% in the third quarter last year, translating into a decline in acquisition cost per user. Moreover, as our e-commerce platform continues to enjoy increasing popularity among our users and brings in growing traffic, the average acquisition cost is expected to further decrease in the future. Just to echo what Ning mentioned earlier, our consumption-driven services from both our e-commerce platform and Yiren Select have helped build up a more dynamic and integrated ecosystem including synergies between different business lines. On the funding side, as we continue to increase and diversify our funding partners, we expect to see a continued decline in the funding cost in the coming quarters. Last but not least, the asset quality of the new loan shows stability and an improving trend. Our FPP 30-plus delinquency rate in the third quarter reached 0.49%, still at a historical low as a result of our continued efforts in customer segmentation and risk control tightening. With that, I will now pass it on to Na, who will go through the financials for the third quarter this year.

Na Mei, CFO

Okay. Thank you, Mei, and hello, everyone. For this quarter's financial update, I will focus on key financial highlights only. Please refer to our earnings release deck for further detail. We delivered solid results this quarter, with total revenue reaching RMB 841 million, accounting for 56% of total revenue in the first half of this year, with an accelerated recovery from the temporary impact of our product restructuring and the pandemic lockdown. As you may have noticed, we recognized our revenue segmentation in the third quarter last year to high e-commerce revenue as our strategy deployment in consumption-driven services started to set off and shifted to a multi-matchmaker ecosystem with enhanced customer engagement, activity, and long-term value. Contribution from holistic-wealth business reached RMB 294 million in the third quarter and accounted for 35% of the total revenue, up 8 percentage points compared with the same period last year. This is in line with our strategy proceeding as a personal financial management platform that differentiates us from our leading peers. On the credit side, our total facilitated loan this quarter is RMB 6.3 billion, realizing double-digit growth quarter-over-quarter and rebounding to the restructuring level of last year, driven by the rate of our small revolving loan. Revenue from credit-tech services reached RMB 493 million this quarter, accounting for nearly 50% of that of the first half of this year. Our average borrowing cost has fallen to 24.3% for all new loan facilities in October, reflecting our ongoing commitment to financial inclusion and in line with the regulatory directive. On the income side, total operating income was RMB 505 million this quarter, decreased by 38% compared with the third quarter last year. Sales and marketing expense decreased by 66% to RMB 136 million from the same period last year, mainly driven by cost savings as we optimize our offline business which Mei has stated today. General and administrative expenses increased by 20% year-on-year to RMB 224 million, mainly due to expenses in our insurance work business as well as the increased spend on risk assessment service costs, having updated our risk management policy earlier this year. Allowance for accounts receivable and others decreased by 38% year-over-year to RMB 35 million due to higher provisions booked for our long-term secured loan business last year. We delivered a strong profit of RMB 270 million this quarter, reflecting a net income margin of 32.2%, up 6.2 percentage points year-over-year as we enjoy better unit economics post-restructuring and continue to improve our cost efficiency. Turning to our balance sheet, our net income with a substantial balance sheet reached RMB 5.5 million in total shareholders' equity as of September 30, 2022, increased by 15% compared to December 31 last year. Meanwhile, we remain in a strong cash position with usable cash reaching RMB 4.7 billion, reserving sufficient buffer for the further execution of our share repurchase plan which was announced earlier this year, as well as providing enough fuel for any new business opportunities going forward. Now based on our assessment, our business and the market conditions, we expect revenue in the fourth quarter 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 remarks. Operator, we will now open for questions. Thank you.

Operator, Operator

The first question comes from Boyd Heinz with Equinox Capital.