Earnings Call Transcript - YRD Q1 2023

Operator, Operator

Thank you for standing by, and welcome to the Yiren Digital First 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 Lydia Yu. Please go ahead.

Lydia Yu, Moderator

Thank you, operator. Hello, everyone, and welcome to our first quarter 2023 earnings conference call. Today's call features prepared remarks by the Founder, Chairman and CEO of CreditEase and our CEO, Mr. Ning Tang; and our CFO, Ms. Na Mei. Mr. Raymond Fang, Head of our Consumer Finance, will join the presenters in the Q&A questions. 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 than what we 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 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 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 the line to Ning, our CEO, for opening remarks.

Ning Tang, CEO

Thank you all for joining our earnings conference call today. First, an update on our insurance brokerage business. Total gross premiums reached more than RMB923 million, up 15% year-over-year, of which life and property insurance policies contributed 57% and 43%, respectively. The increase was mainly driven by life insurance policies, which increased 28% year-over-year, significantly outpacing China's life insurance industry premium growth of 8.9%. Our strategy to drive rapid business growth continues to be product innovation, customization, agent development, and digitization. We are invested in our agents and have established programs to help them improve professional skills to enable them to broaden their service scope to cross-sell and up-sell products and services, matching customers' evolving needs throughout their entire lifecycle. We noted initial success this quarter with a significant uptick in first year life insurance premiums from existing property insurance policyholders. On property insurance, as mentioned on our last call, as part of China's Belt and Road initiative, a global infrastructure development strategy. China's outbound investment and construction projects are expanding at a fast pace, bringing new scenarios for insurance protection and coverage. Hexiang, leveraging its advantages in product development, professional risk management expertise, reinsurance qualifications, and partners, is now providing reinsurance for overseas construction insurance policies. We estimate the potential market size for this insurance segment to be at least RMB10 billion. In the first quarter, total premiums for this product segment grew close to 30% quarter-over-quarter. And we expect to see a continued increase over the rest of the year. Next, on the credit side. In the first quarter of 2023, total loan volume was RMB6.4 billion, representing a 39% increase year-over-year. Total number of borrowers in the quarter increased 71% from the prior year to 872,000. The increase was primarily driven by our revolving loan product, Yi Xiang Hua, which actually saw volume increase by 88% from the prior year due to increasing demand. MAU on our Yi Xiang Hua platform is reaching close to 2.2 million users as of quarter-end, increasing 8% from the prior quarter. As our active user base on the platform continues to expand, we have also seen an uptick in our revenue from electronic commerce services, which we consider risk-free revenue, including services like recharging online video and streaming accounts and topping up phone credits. These e-commerce services also present an opportunity to establish our own membership ecosystem, enhancing customer loyalty and engagement. On the funding front, the number of our funding partners continue to grow as we diversify our funding sources, we noted a 16% decrease in institutional funding costs this quarter from the prior year. On asset quality, we maintained a conservative risk management policy this quarter amid a slower-than-expected macro recovery, and we noted an improvement in delinquencies with FPP 30-plus delinquency rate improving to a historic low of 0.6% compared to 0.7% last quarter. This quarter, we started to execute on our international expansion strategy in which we hope to leverage our extensive expertise in the consumer finance sector to promote greater financial inclusion. I am very excited to report that we have completed establishing a wholly owned subsidiary in the Philippines, which owns an online lending license and financing license from the nation's Securities and Exchange Commission. We recently beta launched under the brand Easy Peso and have experienced a substantial surge in demand since then, already accumulating over 190,000 registered users on our app. As of today, we have completed the facilitation of the first loan on the platform and are conservatively controlling our scale while focusing first on refining and enhancing our risk models. We see enormous demand for financial services in these underserved emerging markets, and we expect international markets to become a new growth driver for our business. Going forward, we plan to accelerate our pace of penetration in the Philippines while investing in operational flows to increase automation and enhance cost efficiency. At the same time, we will also start evaluating potential opportunities in other regions around the world. Recently, we've been witnessing the rise of ChatGPT and generative AI technology. We believe that the application of generative AI can disrupt and bring sweeping changes to the financial industry. This quarter, we established an AI lab that will focus on utilizing ChatGPT, large language models, and generative AI technologies to develop applications in each of our business sectors. For example, using personalized chatbots to provide 24/7 customer service for our borrowers or utilizing technology to help our agents increase cross-selling and up-selling. With the launch of our AI lab, we aim to improve the efficiency and effectiveness of our operations, enhance user experience, and drive business growth. Lastly, I would like to say a few words about the management transition we have announced. George is stepping down as CRO, and on behalf of the Board, I would like to express my sincere thanks to George for his outstanding contributions to the Company throughout his years. Concurrently, the Board has selected Ms. Yang Bin to serve as the Company's Chief Human Resources Officer. Together, we are excited to propel the Company to new levels of success. With that, I will now pass it to Na, who will go through the financials for this quarter.

Na Mei, CFO

Thank you and hello everyone. On this call, I will only focus on the key financial highlights. Please refer to our earnings release and IR deck for further details. In the first quarter of 2023, our total revenue reached RMB986.3 million, representing a 14% increase year-over-year and a slight decrease of 9% from the prior quarter. The quarter-over-quarter decrease was mainly driven by changes in our loan volume. Our total facility this quarter was RMB6.4 billion, representing a 39% year-over-year growth and a 5% decline from the prior quarter. The quarter-over-quarter change can be attributed to adjustments in product mix. Essentially, we made adjustments to our small business loans, while we plan on growing our small revolving loan sector. Insurance has become our key revenue driver from reaching close to 20% of our net revenue this quarter. Therefore, from starting this quarter onwards, we will disclose total gross premiums and revenue from our insurance brokerage business. In the first quarter this year, gross written premium reached RMB923.4 million, representing a 15% increase year-over-year and a 31% decline from the prior quarter. The quarter-over-quarter decline was mainly attributable to a decline in policy renewal which was impacted by the timing of the first-year finance. Revenue from the first quarter business reached RMB196.4 million for the quarter, representing an increase of 27% year-over-year and remained stable from the prior quarter. As a portion of our total gross written premium, life insurance policies were both higher this quarter, thereby increasing the revenue take rate from our brokerage business. On the expense side, sales and marketing expenses decreased to 40% to RMB106 million from the same period last year due to the optimization of our cost structure for our offline business and an increase in the proportion of our revolving loans to existing customers. Conversely, our general and service costs increased to 31% year-over-year to RMB200 million, mainly driven by increases in organization and service costs related to our insurance brokerage business. Quarter-over-quarter, our general and service expenses as a percentage of revenue for the insurance sector have remained stable at 58%. G&A decreased by 21% year-over-year to RMB93 million. Allowance for contract assets and receivables was RMB45 million for this quarter, remaining stable, contributing to a profit growth of 0.7% in loan facilities. As for our bottom line, we continue to deliver a strong profit of RMB425 million this quarter, increased 131% year-over-year and representing a net income margin of 53%, with net profit increasing by RMB390 million cash from operating in the fourth quarter, an increase of 40% from the prior quarter. Our total cash and cash equivalents was RMB5.1 billion at the end of the quarter compared to RMB4.3 billion as of year-end last year. With the gradual recovery of our macroeconomic environment, we will proactively seek opportunities to allocate resources to new initiatives and strategic investments, proper technology innovation, and foster business growth. In the first quarter of 2023, we declared around $2.5 million to repurchase our shares in the public market. As of March 31, 2023, the Company has accumulated funds close to $3 million for our share repurchase program. Based on our assessment of business and market conditions, our net total revenue in the second half of this year is projected to be between RMB0.9 billion to RMB1 billion with net profit margin expected to remain stable. Of course, this reflects our current and preliminary view, which is subject to change and uncertainties. With that, we conclude our first remarks. Operator, we are now open for questions. Thank you.

Operator, Operator

Thank you. Your first question comes from Bruce Aurian from New Haven Fund. Please go ahead.

Unidentified Analyst, Analyst

First, I'd like to congratulate you on another outstanding quarter. I have two quick questions. Can you provide insight into whether the PRC government regards financial institutions like Yiren Digital favorably or unfavorably in the current political and economic climate? And my second question is, are you considering offering a dividend to shareholders?

Ning Tang, CEO

Thank you for your questions. Please go ahead.

Na Mei, CFO

I think I can answer the second question. For the first question…

Ning Tang, CEO

Go ahead, please.

Na Mei, CFO

Okay, thank you. I will answer the second question about our dividend policy. Yes, you can see we have purchased our share repurchase supply since last December. By now, we have accumulated about $3 million to perform our share purchases. Currently, our management is mostly focused on utilizing our cash deposits to support our business growth and aim to increase our return ratio. So for now, I can say the Company has no dividend plan.

Ning Tang, CEO

Let me cover the first question. Thank you for your compliment, and we will continue to drive our business forward. Regarding macro conditions, the past few years have been quite dynamic for this sector with many changes. However, things have become much more stable. The economy is recovering from the pandemic, and consumption is encouraged, with small businesses being promoted. So, after the past few dynamic years, we feel that the recent macro environment is quite favorable for our operations.

Operator, Operator

Your next question comes from Matthew Larson from Fincadia. Please go ahead.

Unidentified Analyst, Analyst

Thanks for taking my call. Again, a terrific quarter. If I could offer some advice to increase recognition of your company, you're trading at essentially 1x earnings. If you make RMB0.70 a quarter, we can do the arithmetic, that's RMB280 a year, and that's less than what the stock is trading at, plus you have cash. I see your balance grew north of over $700 million. I have a couple of questions. First, the news release should have noted earnings up 100% instead of just reporting the earnings, as that would catch people's attention. Additionally, you mentioned in your report an artificial intelligence initiative. If you would just say something like we initiated an AI initiative which we expect to expand our business significantly, that alone would attract U.S. investors. If they computed the numbers and saw how undervalued you are compared to your balance, book value, and cash balance, I think that could raise interest. I assume you want your stock to go higher. Frankly, I worked at Morgan Stanley when you guys went public in December 2015 when you were a peer-to-peer lender, and you've done a great job transitioning since then. I think you need to get the word out there in a more detailed and animated way to gain attention. Regarding your loans, do you keep your loans on your balance sheet?

Na Mei, CFO

Yes, I can answer your question. Yes, for our lending business, we operate under two models. One model utilizes our guaranteed income, meaning the loans are kept on our balance sheet. The second model primarily promotes performance and references asset sales channels to our funding partners, and we do not bear guarantee responsibility for those loans.

Unidentified Analyst, Analyst

To be licensed to make loans, one has to take some risk. I see that some of your former competitors are keeping more of the loans on their balance sheets. Regarding your cash balance, I see that you had a lot of investment income. Was that just interest on your cash balance? You should be earning significant interest with rising rates, which should be a notable part of your income.

Ning Tang, CEO

Na, are you taking this question?

Unidentified Analyst, Analyst

Yes, you have a lot of cash, $700 million. What sort of interest are you earning on that?

Na Mei, CFO

We have about RMB5.9 billion in deposits on our balance sheet. For our cash base, we have profit from deposits and profit from our funding partners for our financial products. Additionally, this year, we have established trust lines for our own products in Hexiang. As for the first quarter, our own money has already set up the track for loans amounting to about RMB300 million. The transaction amount is expected to be about RMB600 million by the end of the second quarter. We plan to utilize our own funds to service our products and will profit from the-owned profile in Yi Xiang Hua. We are also exploring overseas strategies while utilizing funds for technology innovations, as I mentioned regarding our AI lab. Our management is consistently seeking opportunities to improve our return ratios and maintain stable profit.

Ning Tang, CEO

It's great to meet an old friend. The past few years have not been easy for us or our stakeholders. I am truly sorry that we have not delivered great returns for those who have trusted us. We will continue to double our efforts to improve. We welcome your advice on making our announcements more eye-catching. We did not highlight the AI initiative as much as we should because we see many use it merely as a market label, but we hope to utilize it effectively in our daily operations to achieve better results. Your point is well taken. We will be more proactive in our communications. As for our growth strategy, the domestic lending business is generating high growth and profit, although it is not on a large scale yet. We are catching up and believe we will significantly improve in the coming years. At the same time, we are committed to excelling in the insurance space. Our successful foundation in insurance will be a key differentiator. Another growth strategy involves expanding internationally. We have already started in the Philippines and will explore further opportunities post-pandemic.

Unidentified Analyst, Analyst

I appreciate that insight. Your stock should be significantly higher. Companies from the PRC often fly under the radar, and your stock trades well below liquid assets. You mentioned a share buyback, which could be beneficial. It appears there were no shares purchased in the first quarter. Given your cash position, you could easily buy back $10 million, $20 million, or even $30 million worth of stock, reducing your float. Do you expect to buy back any shares since you are not planning a dividend this quarter?

Ning Tang, CEO

Na, do you want to take this question?

Na Mei, CFO

As I mentioned previously, we have performed our share repurchases since December of last year after Board approval. To date, we have used about $3 million for repurchases. We will continue our share buyback program because our Board has approved a total of $20 million. We will utilize this amount gradually throughout the year.

Unidentified Analyst, Analyst

With the stock price so low, you don't need to be sensitive to the stock price. If you put a bid in for 5 million shares, it would alert investors that there is a serious buyer. It would also be very accretive since your book value is substantially higher than the current trading price. With your cash position, your own stock might be one of the best investments.

Na Mei, CFO

I appreciate your concern and thank you for your comments. I will discuss final details regarding our share repurchase practice since we are restricted by U.S. regulations. Our share buyback amount is based on guidelines we operate under with our broker, so we can only conduct purchases up to a certain volume each day.

Unidentified Analyst, Analyst

I understand the limitations by volume. Thank you for your time, and keep up the excellent work. I think it's essential to get the message out so that investors recognize your AI application as a valid strategy. Highlight your year-over-year earnings growth, and I believe that a compelling news release will generate interest.

Ning Tang, CEO

Thank you for the advice.

Operator, Operator

Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.