Earnings Call Transcript - YRD Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Yiren Digital Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. And after the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your first speaker today, Mr. Lydia Yu. Please go ahead, ma'am.

Lydia Yu, Founder, Chairman and CEO

Thank you. Today's call features a presentation by the Founder, Chairman and CEO of CreditEase and our CEO, Mr. Ning Tang; our SVP, Ms. Mei Zhou; and our CFO, Ms. Na Mei. Before we begin, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation 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 the company's filings with the US 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 several 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 financial information prepared and presented in accordance with US GAAP. For information about these non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I'll now pass on to Ning for opening remarks.

Ning Tang, CEO

Thank you all for joining us today. We are very pleased to deliver another solid quarter with continued improvement in profitability and an increasingly diversified revenue mix as we further navigate Yiren Digital to become a leading user-centric personal financial management platform. As we continue to strengthen our competitive edge and drive up our business scale, we have developed sophisticated strategies for both our wealth management and credit businesses. For wealth management, we are further differentiating ourselves by upgrading our services and enriching our product offerings. For example, in the second quarter, we started to offer retirement plans and services, partnering with the leading global investment management company, Principal, which received immediate popularity since its launch. As we further dive into the retirement financial market, our new products and services will help enhance our customers' lifetime value. Moreover, we are enhancing our capabilities to serve customers with higher investable assets, and the number of users who invested more than RMB 0.5 million in one single transaction on our platform this quarter increased by 126% compared to last quarter. Meanwhile, for our credit business, we are focusing on high-quality growth and continuing to take a proactive approach to transition our target borrower segment into higher credit quality borrowers, paving the way for the launch of our increasingly diversified products in the future. Secondly, we are deepening our deployment in small business markets in the second half of 2021 and will further diversify the product mix by increasing SME loans. Lastly, as a user-centric financial management platform, we are making continued efforts to integrate our different business lines and service scenarios, addressing the comprehensive financial needs of each customer. For example, we are offering suitable insurance products to our borrowers to better protect them and their families, which Mei will talk about later. Through the strategies and moves mentioned above, we believe that Yiren Digital is well-positioned to expand its business as the leading personal financial management platform. Now, I will provide a business update on our wealth management side before passing over to Mei to give an update on our credit business. Our wealth management business continues to see visible growth this quarter. Client assets for investment products reached RMB 14.7 billion as of June 30, 2021, representing an increase of 37% quarter-over-quarter. The total number of active investors stood at 386,000 as of June 30, 2021, representing an increase of 26% from last quarter. Meanwhile, the average client asset per investor further increased by 17% quarter-over-quarter to close to RMB 100,000. The number of investors who held more than two asset classes on our Yiren wealth platform grew by 420% from the prior year, reflecting a concrete improvement in our customers' overall lifetime value. On investor acquisition, we continue to invest in our brand to increase recognition and customer engagement. On May 28, our live anniversary program was joined by 20% of our active investors, which is a vivid reflection of our high customer engagement and loyalty. It's worth mentioning that our fund products became one of the key growth drivers this quarter. Specifically, our retirement fund of funds enjoyed immediate success right after its launch in June, which contributed RMB 23 million in transaction volume in just 23 days. Moreover, our recently launched new version of portfolio products that offer more flexible target returns were also well received among investors, with sales volume increasing by 80% compared with last quarter. Next to our insurance business, Hexiang Insurance Brokers, the business growth remained strong. In the second quarter of 2021, total premiums were approximately RMB 570 million, up more than 130% quarter-over-quarter. For Hexiang, we are focused on growing through our closed loop 2B 2C strategy in which, post-serving our corporate clients and fulfilling their insurance needs, we then leverage our insurance tech capabilities and provide customized and targeted insurance products to their clients and customers, transitioning our corporate customers into partner channels, helping them unlock a completely new revenue stream while simultaneously finding new customers with unmet insurance needs. Lastly, our digital stock brokerage platform, China Glory Securities, was officially launched this quarter, which is a meaningful milestone for us to establish a full spectrum wealth management product mix and to bring strong synergies into our wealth management ecosystem. The platform targets both mass affluent and high net worth customer segments, and apparently, we offer both Hong Kong and the US stocks, ETFs, and REITs, with more services and products to hit the shelves soon. Meanwhile, we believe that investing in investor education is core to driving business growth. That's why we have created a variety of educational content suitable for investors at each stage of their investing journey, including daily and weekly live stream sessions to review market performance as well as trending topics and daily financial news. On customer acquisition, in addition to strong support from our wealth management ecosystem, we're also focusing on a 2B 2C strategy with over 10 partner channels already in our pipeline. With that, I will now turn the call over to Mei who will highlight key updates for our credit business this quarter.

Mei Zhou, SVP

Thanks, Ning. This is Mei Zhou. Hello, everyone. Now, before I go through the operational highlights of our credit business, I would like to share our response to the recent regulatory development and to echo what Ning just mentioned about our initiatives in credit business strategies. As of July, a window guidance came out from the local financial regulatory requiring financial institutions to cap the APR of customer loans at 24%. We think that is a potential new requirement beneficial for the industry as it completely eliminates the market's concerns over APR and pricing. In response, since last year, we have transitioned our target customer segment to higher credit quality borrowers through implementing targeted credit products, including APRs of 18% to 24% as well as interest-free loan products. In addition to the local government's focus on supporting small and micro businesses, starting from the second half of this year, we will further expand our SME segment to better promote inclusive finance. Historically, we have been serving small business owners for years and have accumulated great experience and expertise in product design, customer acquisition, and servicing. Coupled with our strong technology capabilities and efficient channel partners, we expect to see meaningful growth in this segment. Now, I will provide an update on our credit business for this quarter. We saw stable business growth in the second quarter as we are making strategic transitions aimed at regulatory changes. Loan volume and facilities in the second quarter stood at RMB 5.3 billion, representing an increase of 7% from last quarter and 245% from the same period last year. The total number of borrowers served in the second quarter reached more than 434,000, an increase of 25% quarter-over-quarter or 304% year-on-year. Meanwhile, our products' unit economics continue to improve as we enhance our operating efficiency. We continue to see declining trends in our acquisition costs as our repeat borrowing rates increase and as our product and service offerings broaden. Moreover, we have seen visible progress in cross-selling insurance products to our borrower base. Total premium contributed by borrowers in the second quarter saw a 55% increase compared with the last quarter, and the demand remains strong. In alignment with our positioning as a user-centric personal financial management platform, we provide customized services based on user needs rather than simply by loan type, which means that we value each customer's comprehensive demand for financial services and respond to their different needs accordingly, enhancing our customers' lifetime value. On the funding side, we continue to focus on expanding our funding partners and received an additional RMB 10 billion in credit lines this quarter, with another 20 financial institutions in our pipeline. Lastly, on risk performance, we have seen stable and improving asset quality. As of June, the delinquency rates for loans originated that are past due for 15 to 29 days, 30 to 59 days, and 60 to 89 days were 0.5%, 0.8%, and 0.7% respectively, remaining at our historical lowest level. As we continue to upgrade our customer segment, we expect our asset quality to continue to improve throughout the year. With that, I will now pass it to our CFO, Na, who will provide this quarter's financial update.

Na Mei, CFO

Okay. Thank you, Mei. Hello, everyone. For the financial update, I will focus on key items of business operation and financial performance only. You can now refer to the detailed financial results in our earnings release and IR deck that has been posted on our website. Firstly on our operating highlights. For our wealth management business, as of June 30, 2021, we have cumulatively served 2.5 million investors, and the number of active investors this quarter continued to grow to 385,536, an increase of 26% from last quarter. Client assets in investment products climbed to RMB 14.7 million as of June 30, 2021, representing growth of 37% from last quarter. On the credit side, total loan facilities in the second quarter reached RMB 5.3 billion, showing an increase quarter-over-quarter. The number of borrowers served this quarter stood at 434,153, representing an increase of 25% from last quarter. Now on to our financials. In the second quarter, total revenue increased by 49% year-on-year to RMB 1.1 billion, of which 27% came from our wealth management business. Due to enhanced cost control and operating efficiency, total net income in the second quarter grew by 10% quarter-over-quarter, representing a healthy net income margin of 18%. Total operating expenses decreased by 17% year-on-year to RMB 0.8 billion. Sales and marketing expenses decreased by 40% from the prior year to RMB 457 million, driven by improved customer acquisition efficiency. Our origination and service expenses increased 11% from the prior year to RMB 183 million, mainly due to the continued expansion of our insurance business. Allowance for contract assets, receivables, and others was RMB 93 billion this quarter, equivalent to 1.8% of our loan volume as compared to 2.9% last quarter. The decline was largely driven by improved asset quality and the change in product mix. On the balance sheet side, our cash position is again strong with RMB 2.2 billion of cash and cash equivalents as of June 30, 2021. Our strong balance sheet positions us well in the current operating environment and provides us with sufficient resilience to continue employing new initiatives and new opportunities and to meet annual capital requirements that may come. This concludes our prepared remarks. Operator, we're waiting for Q&A.

Operator, Operator

First question is from the line of Cindy Wang of DBS.

Cindy Wang, Analyst

Congrats for the great quarter. I have three questions if I may. My first question is related to wealth management. Since sales volume of investment products was slightly slowing down from the first quarter of this year, can we know what's the reasoning behind it? Is that because of seasonal effect or listing product adjustment on the platform? Besides that, the fee rate for wealth management products is also down sequentially. Is that because investors are subscribing to more lower fee rate products on the platform or any other reasons behind it? So, entering the second half of this year, how do we expect the trend of sales volume and the fee rate? My second question is related to insurance. Since lately, regulators have issued an announcement related to the inspection on selling insurance products online. What process have you taken? And is that going to impact your insurance sales in the second half of this year? And the last question is related to consumer credit. Could we have the breakdown of auto loan and small revolving loan ratio? Since you highlighted that you will expand to the SME segment to better promote inclusive financing in the second half of this year, so do you have any loan mix target that you could share with us about the auto loan, SME loan, and small revolving loan? And besides that, since the take rate for consumer credit further came down in the second quarter, I think it's mainly because you acquired better quality borrowers which have a lower APR. Since the window guidance has capped the APR at 24%, how do we see the take rate in the second half of this year and going forward?

Ning Tang, CEO

I will have our CFO, Na, answer the first question regarding the wealth management business, fee rate, and so on. And then our wealth management business head is also online who can cover the second question regarding insurance regulatory updates, and also, if she may, comment on wealth management. The third question will be covered by Mei Zhou.

Na Mei, CFO

For the first question, I will answer why the fee rate for our wealth management is down compared to the last quarter. It's mainly due to the mix of the products, especially the move from the fourth quarter to last quarter. The main product of insurance is from life insurance for people. The channel commission for the insurance company is higher, about general 17% or 18%. But in the second quarter of this year, the main product has been about assets. So, for asset insurance, the premiums are lower than life insurance, and the general commission channel is about 14% to 15% from the insurance company. So, that is the reason why the fee rates are down for our wealth management. It's mainly due to product mix.

Ning Tang, CEO

And, Zhou, you will talk about the insurance policy change?

Na Mei, CFO

This is Na. For the regulation about our insurance, I will confirm that primarily, the insurance regulator is mainly about the online insurance service. But Hexiang is also mainly offline, so our management doesn't think they have any new regulations that would affect our insurance business.

Ning Tang, CEO

I echo that. We don't see any negative impact on how we conduct our insurance business. And, Mei, can you please answer the third question?

Mei Zhou, SVP

This is Mei. I think for the credit business, we have been involved in the auto loan business for a long time. Some of the customers are actually SME owners. I think for our SME segment, we have many existing customers. We do treat them as different products to lower the product mix from better customer performance. The percentage is around 20% to 30%. As we continue to expand our existing customer segment, I believe this percentage will improve to 60%. That's why our asset quality is getting better and better.

Operator, Operator

As there are no further questions at this time, management, please continue.

Lydia Yu, Founder, Chairman and CEO

Thank you, everyone, for joining our call. This concludes our call for today. Thank you.

Ning Tang, CEO

Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. And thank you for participating. You may now all disconnect.