Akso Health Group (AHG) 2018 Q4 法說會逐字稿

Thank you for standing by for the Hexindai's Fourth Quarter and Fiscal Year 2018 Earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded.

I would now like to turn the meeting over to your host for today's call to Ms. Daisy Wang, Investor Relations Director. Please proceed, Daisy.

Thank you, Operator.

Hello everyone and thank you for joining us today. Our earnings release was distributed earlier today and is available on our I.R. website at ir.hexindai.com.

On the call today from Hexindai are Mr. Xinming Zhou, our Chief Executive Officer, and Mr. Johnson Zhang, Chief Financial Officer, and Mr. Zecheng Wang, Chief Marketing Officer. Mr. Zhou will review business operations and company highlights followed by Mr. Zhang who will discuss financials and guidance. The management team will be available to answer your questions during the Q&A session that follows.

Before we begin, I would like to remind you that this conference call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements are made under the Safe Harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. These statements can be identified by terminologies such as "will," "expect," "anticipate," "future," "intends," "plan," "believes," "estimates," "potential," "continue," "ongoing," "targets," "guidance," and similar statements.

The Company may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission, the SEC, in its annual reports to shareholders in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties.

Any statements that are not historical facts, including statements about the Company's beliefs and expectations are forward-looking statements that involve factors, risks and uncertainties that could cause actual results to differ materially from those discussed in. Such factors and risks include, but not limited to the following, the Company's goals and strategies; its future business developments, financial condition and result of operations, the expected growth of the credit industry, the marketplace lending in particular, in China; the demand for and market acceptance of its marketplace's products and services; its ability to attract and retain borrowers and investors in earnings platform; its relationships with its strategic cooperation partners; competition in the industry; and relevant government policies and regulations relating to the corporate structure, business and industry.

Further information regarding this and other risks, uncertainties or factors is included in the Company's filings with the SEC. All information provided in this call is current as of the date of this call, and the Company does not undertake any obligation to update such information, except as required under law.

It is now my pleasure to introduce our CEO, Mr. Xinming Zhou. Please go ahead, Mr. Zhou.

Thank you, Daisy, and thank you everyone for joining our call today. We finished the year with another solid quarter in which loan volumes in the fourth quarter continued to grow at a triple digit pace, increasing 237% to $418 million. This brings total loan principal since our inception to $226 billion. We facilitated loans to more than 23,000 borrowers during the quarter, an increase of 285% from the same period last year. Growth momentum continues to be driven by our expanded online and offline user acquisition capacities, and improved the user conversion rate as well as our platform reputation, security, trust and convenience.

The fourth quarter is seasonally our slowest quarter is due to the impact from Chinese New Year. Its loan volumes grow at a faster pace year-over-year this quarter when compared to last quarter, which I believe demonstrates just how much progress we have made in strengthening our services offering and improving operational efficiency.

We have been developing new loan service offerings, which will be customized to target a specific demographic standard profiles within our (inaudible) there was borrower base. We continue to expand online borrower acquisition channels and resources, and enhancing our online borrower acquisition offer for about 11% of the total loan volume during this fiscal year 2018 was acquired through online channels compared to no loans were facilitated as well online channels in fiscal year 2017.

To further diversify and expand our investor acquisition channels, we opened a call center in Hefei City, Anhui Province during the quarter, which will facilitate first-time investments from registered investors on our platform. The call center will also focus on facilitating the investment of any funds from the investor accounts that have yet to be invested. By engaging more active with our investor base, we hope to not only increase total loan volumes facilitated on our platform, but also increase loyalty to our platform through education and outreach.

Turning now to industry outlook, the largest issue in December 2017 to complete a ratification and the preliminary filing by end of June this year was postponed by regulators despite the uncertainty in market this have created the number of activity platforms, continued to decrease from 2000 at the end of 2017 year to around 1,600 today as the market for the [consolidate].

Increased regulation, we help create a healthier market environment over the long-term and then we are with the barriers to entry, so we believe we are fully compliant with current regulations, and I have the utmost confidence in our internal operations. And as industry consolidates into the tightening relations, we believe that we are really positioned to expand our market this year.

I'm very pleased with our performance during the quarter that we began fiscal year 2017 on a very strong footing. We will continue to invest in expanding borrower and the investor engagement and the acquisition, (inaudible) our risk management system and improve our operational efficiency in order to reinforce our competitive advantage in this enormous and growing market to consumer lending in China.

With that, now I will turn the call over to John who will be reviewing the financials (inaudible).

Thank you, Mr. Zhou.

Hello everyone. Thank you for joining our Fourth Quarter and the Fiscal Year 2018 Earnings conference call today. We are pleased to deliver another solid quarter and to wrap-up the year of significant operational and financial growth.

First, I will go over some highlights. During the fourth quarter of fiscal year 2018, total volume of loans facilitated increased to 237% year-over-year to $418 million or RMB2.27 billion, $28 million of our guidance. The increase was currently attributable to the increase in the number of borrowers from 8,651 to 33,322. Our net revenue increased to 271% year-over-year to $27.6 million and net income increased to 303% year-over-year to $17 million. And the result of the successful improvement to our operational efficiency, the solid progress remained in our operational performance can be seen in our operational expenses as a percentage of net revenue, which decreased from 52% through the fourth quarter of fiscal year 2018 from 52% in the fourth quarter of 2017 to 30% in the fourth quarter of fiscal year 2018.

During the fiscal year ended March 31, 2018, total loan volumes facilitated was $1,258 million which translated to RMB8.3 billion, an increase of 151% from $493 million or RMB3.3 billion during fiscal year 2017. Number of borrowers was 101,172, an increase of 252% from fiscal year 2017. Number of investors was 137,950 during the fiscal year ended March 31, 2018, an increase of 118% from the same period of fiscal year 2017.

Now I would like to walk you through more details of our financial results during the fourth quarter of fiscal year 2018. As I mentioned, the net revenue was $27.6 million, an increase of 271% from same period last year. The increase was primarily due to the significant increase in the volume of credit loans facilitated through our marketplace. We have increased it from $0.1 billion or RMB0.7 billion, the fourth quarter of fiscal year 2017 to $0.4 billion or RMB2.7 billion in the same quarter of fiscal year 2018.

Annual average investment yield decreased to 20% during the fourth quarter of fiscal year 2018 from 14% during the same quarter of last fiscal year.

Our risk return liability decreased from $0.8 million to nil. Operating expenses was $8.4 million, an increase of 115% from the fourth quarter of fiscal year 2017. The increase was driven primarily by an increase in sales and marketing expenses, general and administrative expenses, and [service] recommendation.

Sales and marketing expenses was $3.5 million, an increase of 80% from fourth quarter of fiscal year 2017. The increase was primarily due to an increase in employee expenses and a series of promotional and a brand image campaign to enhance Company's brand recognition and attract more customers. We continue to invest in our marketplace app and expanding our user acquisition channels through search engines and different industry corporation projects, which we expect will continue to refer more customers for our platform and generate higher health cushion rate.

Service and development expenses were $2.1 million, an increase of 51%. From the same period of fiscal year 2017, the increase was primarily attributable to an increase in employee expenses, custodian bank accounts, management fees and rental and (inaudible) management fees, which were mainly driven by the push in the volume of both facilitated through our marketplace platform.

General and administrative expenses were $1.7 million, an increase of 157% from the fourth quarter of fiscal year 2017. The increase was due primarily to an increase in employee expenses and the professional service fees.

Share-based compensation, during the fourth quarter of fiscal year 2018, was $1.1 million, increased from nil during the same period of last fiscal year. The increase was attributable to awards granted under the 2016 Equity Incentive Plan since November 3, 2017 on which date the Company completed its IPO.

Net income increased by 303% to $17 million from $4.2 million during the fourth quarter of fiscal year 2017. Adjusted net income attributable to Company's shareholders, which excluded share-based compensation expenses increased by 330% to $18.2 million from $4.2 million in the same period of last fiscal year.

Adjusted EBIT, which included interest income, income tax and the share-based compensation increased by 473% to $24.4 million from $3.6 million in the fourth quarter of fiscal year 2017.

I'll now quickly go over our fiscal year 2018 results. During the fiscal year ended March 31, 2018, net revenue was $107.3 million, an increase of 368 in percentage from $28.9 million. In the last fiscal year, the increase was mainly driven by the significant increase in the volume of private loans, which increased from RMB2.3 billion or $377 million in the fiscal year 2017 to RMB8.3 billion or $1.2 billion in fiscal year 2018.

Annual average investment yield decreased to 12% during fiscal year 2018 from 13% during last fiscal year. We believe we are still have an opportunity to increase investment yield from investors on our platform. We expect it to acquire more risk-adverse investors going forward. We believe that most of the decrease of the investment yield will be transferred into our own revenue.

Our risk return liability increased from $4.9 million last fiscal year to nil in fiscal year 2018 and our risk return liability currently was discontinued and replaced by a third party insurance arrangement starting February 1, 2017, which also contributed to the increase in the net revenue.

Operating expenses during the year was $31.4 million, an increase of 141% from the fiscal year 2017. Sales and marketing expenses was $15.2 million, an increase of 192% from fiscal year 2017. Service and development expenses was $8.5 million, an increase of 55% from last fiscal year.

General and administrative expenses was $5.8 million, an increase of 120% from fiscal year 2017. Share-based compensation was $1.8 million, increased from nil during last fiscal year.

Net income increased by 664% to $55.5 million from $8.6 million last fiscal year. Adjusted net income attributable to the Company shareholders, which excluded share-based compensation expenses increased by 686% to $67.3 million from $8.6 million in the last fiscal year. Adjusted EBIT, which excluded increased income, income tax and share-based compensation increased by 679% to $78 million from $10 million in fiscal year 2017.

We generated a strong operating cash flow and cash position. Net cash provided by operating activities was $87.7 million during fiscal year 2018 compared to $8.2 million in fiscal year 2017. As of March 31, 2018, our cash position stood at $132.6 million compared with $19.2 million. As of March 31, 2017, the increase in the total balance of cash was mainly due to increased operating cash as a result of our accelerated business growth and the net proceeds from our IPO after deducting related costs expenses.

As we have continually emphasized, we are investing in qualified borrower acquisition by developing deep partnerships and innovating new technologies, security tools and products. We believe that the acquisition of qualified borrowers and our ability to rapidly generate recurring revenue will directly impact our ability to grow sustainability over the long-term.

Turning to revenue guidance for fourth quarter of fiscal year 2019, we expect the loan volume to be in the range of $416 million to $510 million, total net revenue to be in the range of $51 million to $56 million, and adjusted net income to be in the range of $26 million to $29 million.

For the full fiscal year 2019, we expect the loan volume to be in the range of $1.9 billion to $2.1 billion, total net revenue to be in the range of $240 million to $260 million, and adjusted net income to be in the range of $115 million to $127 million.

This concludes our prepared remarks. I'd now like to turn the call back over to the operator to begin the Q&A session.

(Operator Instructions)

Your first question comes from the line of Bo Pang from China Renaissance. Go ahead. Please ask your question.

Hi, Xinming, Johnson and Daisy. Congrats on the stunning year. So I do have a couple questions here. First question would be on your pricing. I see your APR is down a little bit versus previous roughly 28% level. So I just wonder whether you guys like voluntarily move up to the high quality customer group and how that implies a long-term APR level and customer quality structure. This is my first question.

Second question will be on the delinquency. Your delinquency level is up a little bit from 3% to 4% due to the maturity of the loan and maybe some other reasons, so I just wonder whether this is different from the previous expectation of ultimately like 5% level, and that also associated to the delinquency rate, how the insurance premium changed in this quarter. This is my second question.

My third question is regarding to the funding of that, Okay. Due to the regulation delay, I said as the previously licensing delay, so the consolidation of the market is also slow a little bit, so I just wonder we've seen the funding size a little bit lately, so I want to get an idea on your expectation on the funding cost, and then also on the other hand whether you guys have a plan to move toward the loan facilitation model partnering with bank. This is my third question.

My last question will be on the 2019 outlook. Though I see your number is pretty encouraging with a 60% year-over-year loan growth and a 130% of revenue growth, I want to get a better sense on what's the drivers behind these solid growth and improvement on monetization. And also we've seen that the Beijing Bureau is kind of more stringent on the P2P volume control, so some of your competitors already got meaningfully impacted. I want to know whether we will face the similar challenge down the road in fiscal year 2019.

That'll be it. Thank you.

Our [articulate APR] is close to 28%. And I believe that the 36% is kind of [track] and 28% is kind of comparative track we are offering to the consumer loan in our marketplace. And for the long-term, we believe that for the consumer loan marketplace were sustainable at the same level as before.

And for our management team, our management team have over 10 years experience, have already experienced in several economic credit cycle, and we have a strategy that we will lower pricing when the economy is going better to do more right-size grade C - or grade C level borrower. And if the economy go in recession, our strategy is to move conservative to control the risk. And we prefer to do more grade C level forward.

And regarding to your question about delinquency, as our number from [first rotator], our [depot] rate goes to 4% and if we normalize the (inaudible) go to material, as you expected the normalized growth rate will be close to 5% that is also matched our expectation. And of course, we also have [disclosed] that we have already renewed the equipment with Changan Insurance.

Changan Insurance have already increased 2% of kind of a service fee, and we have - they have told us they can offer service fee as kind of a premium, and then with effective premium will be implied to 4.4%. That 4.4% of premium will be implied in the new fiscal year.

Although we will maintain all-inclusive APR cash to borrower, if the premium rate increased either all revenue will increase or the yield rate to the investor will be increased. And as we have mentioned in our earnings call, we have already practiced [more risk reward] investor, and we believe that we do have a [spread] to decrease yield rate to the lenders. In that way, we could still keep our growth [ratio] in the next fiscal year.

And for the [outsourcing] organic to the current regulation environment, we don't think it is a good time to cooperate with the financial institutions in the (inaudible). And we also do not rely on any financial institutions; we are relying on our own 2.5 million investors. And every quarter, there are 16,000 active investors (inaudible) from [rate outside]. We believe that that would be more stable rather than other peer companies who is relying well to financial institutions.

And regarding to our guidance, both revenue and loan volume are expected to increase over 100%. I think the first requirement is [China economics fuel] growth and the younger generation prefer to (inaudible) as well. And the consumer finance demand is still very strong.

According to Oliver Wyman's research the consumer finance in terms of loan volume increased in the two, three years. The CAGR is supposed to 49%. And I think the second driver is as we are kind of top companies, the [protection] are rather more concentrated on top companies. In that way, our growth rate would be faster than the industry average level.

And the third driver is that we have already expanded the online/offline channels in the last fiscal year, some of the offline channels have not been (inaudible) the full capacity. And for the new fiscal year, our offline channel will still grow and the new branches we discussed it on the last fiscal year will be as a full capacity.

And for online side, we got to establish some coverage with the search engine and [DPPT] distributor in the last fiscal year. And we still have a lot of space to increase our conversion rate. In our view, our online channel growth rate would be faster than our offline kind of growth rate. That's three key drivers to contribute to our over 100% growth in both revenue and loan model.

And regarding to the regulation, I'll go through to our CEO Xinming.

Okay. (Speaking Foreign Language)

Let me help with the translation here. Right before we started our IPO we have $13 million loan volume that was exceeding the 200,000 limit for personal loans. We've adjusted according to the regulation released in the Q4 of 2017, which was similar to the regulation that we are talking about now. And according to the regulations there, we analyzed the regulation and we conformed with that, the measures were only to limit the non-compliant businesses not for the whole business of any platform.

And also if we look at the P2P platform in Shanghai and for the listed companies in Shanghai in this industry, the business scale has not been impacted by that merger, so it's not against the P2P platform that are being received and is only to limit the non-compliant businesses of any platforms.

Thank you. I have two more follow-up, if I may. So first one is on your online channel, so since your online channel is growing faster than offline, I wonder how could you make a better control over the online traffic quality because as was seen in your competitor, their online traffic is delinquency rate is twice the offline channel. Also, their online approval rate is only a fraction of offline, so I wonder when you move toward the online channel whether there will be a negative impact on, for example, your user acquisition cost or your conversion rate. That's the number one question.

Number two question is on the overall loan margin trend. So given your third party insurance partner or any raised the premium and also you are voluntarily lowered your APR level to have a better control over asset quality, it seems to me that the loan margin is under a little bit pressure into the 2019 fiscal year. However, your revenue guidance is similar level to your loan volume growth guidance. So I just wonder what I missed to really better understand the trajectory of the loan margin trend in the long-term especially during the online lending rectification period. Could you please clarify that? Thank you.

Thank you. I think whether the borrower is from online or offline channel, our risk management process are the same. For example, some of the online channel, comparing with the other online channel, it's true their borrowers quality are quite different, but from the channel A better quality borrower, our approval rate will be higher. And so the channel B, the borrower is lower quality, our approval rate would be lower.

As a whole, no matter which channel the borrowers come from, our [material are the same]. And from our operating online channel for the past several quarters, we haven't observed their delinquency rate (inaudible) check out rate have a significant difference with the offline channel.

And if we're comparing with the acquisition cost between online channel and the offline channel, our offline channel acquisition is 6% and for the online channel, the acquisition cost is also close to 6%. And if the Internet traffic price continue at the same and even increased later, we believe that our conversion rates would have a chance to increase during our [image] becomes stronger. And if our conversion rate increased, we still have an opportunity to decrease the acquisition cost in [revenue].

And regarding to our whole market, our [APR] will [maintain tax] to the borrowers will be maintained as the last fiscal year as before. And then we expected that the yield rate to the lender will be increased in the next fiscal year. And those kind of decrease would be -- part of them will be upside to the increase of the insurance premium. And a part of that will be transferred to our [bull] marketing. In that way, we believe that our [partner] scenario, our markets will be improved and our [most] conservative scenario, our market will be same as fiscal year 2018.

In our guidance, we apply kind of (inaudible) scenario. Thank you.

Thank you very much for the color. Thank you.

Your next question comes from the line of Jian Yang of Essence Securities. Please ask your question.

Thanks, Management, for taking my questions. I have two quick questions, and the first one is what is your strategy to drive revenue growth in midterm in the next two to three years?

And the second one is we noticed that currently, you have a promotion of additional 280 points from interest rates in your app and who will [pay the cost] and will it have any impact on the margin? Thank you.

Thank you again. We're trying to continue investing and upgrade our operating infrastructure and [give] a stronger business. This will primarily focus on investing in technology first, strengthening our risk management system and adding high healthcare, and improving our ability to regularly assess it and increasing amount of all applications with big data analytics.

As a bigger company, we believe we will be to able to attract more and more borrowers and lenders and scale up our [growth model], upgrade our risk control and the [background] assistance, improve our privacy protection measures and help our anti-fraud and bidding systems. In addition, we will continue [improving] by implementing [assisted] marketing strategy to promote our brand through traditional media and being online advertising and the social media.

And for our promotion today is a (inaudible) anniversary marketing campaign. And we don't believe that this one-time promotion impacted to our P&L at a significant level.

Okay, thank you.

Okay.

(Operator Instructions) There are no further question at this time. I would now like to hand the conference back to Ms. Daisy Wang. Please continue.

Thank you, Operator.

In closing, on behalf of the entire Hexindai Management Team, we like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.