FinVolution Group (FINV) 2019 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for participating in the Third Quarter 2019 Earnings Conference Call for FinVolution Group, formerly known as PPDAI Group Inc., or Paipaidai. (Operator Instructions). Today's call is being recorded.

I will now turn the call over to your host, Mr. Jimmy Tan, Investor Relations for the company. Jimmy, please go ahead.

Hello, everyone, and welcome to our third quarter 2019 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company e-mail alerts by visiting the IR section of our website at ir.ppdai.com. Mr. Cliff Zhang, our Chairman and Co-Chief Executive Officer; Mr. Feng Zhang, our Co-Chief Executive Officer; Mr. Simon Ho, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session.

During this call, we will be referring to certain non-GAAP financial 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 these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainties. As such, the company results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company's filings with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Finally, we post a slide presentation on our IR website, providing details of our results for the quarter.

I will now turn the call over to our Chairman and Co-CEO, Cliff. Please go ahead, sir.

Hello, everyone, and thank you for joining our third quarter 2019 earnings conference call today. In the third quarter, we continued to deliver healthy and solid results and transitioned our funding sources towards the institutions. Specifically, the proportion of loan originations facilitated by institution partners increased to 75% for the quarter. More excitingly, our rapid transition in funding base has been achieved, at the same time, with continuous growth in loan volume.

In the third quarter, we achieved year-over-year and quarter-over-quarter loan volume growth of 66% and 14%, respectively, to RMB 24.6 billion. Consequently, for the first 9 months of 2019, our loan origination volume reached RMB 65.3 billion, which has exceeded our loan origination volume in the full year 2018 of RMB 61.5 billion.

Our operating revenue increased by 35% year-over-year to RMB 1.5 billion, and our operating income increased by 32% year-over-year to RMB 649 million.

Many of you may be aware that in our most recent Annual General Meeting, our shareholders approved the change of our name to FinVolution Group, and in Chinese, to (foreign language). Our ticker symbol will also be changed to FINV on the 29th of November. Whilst the PPDAI brand will continue to be the main interface for our borrowers, the rebranding of the group will better reflect our diversified businesses, such as in providing technology-related services to our financial institution partners and our growing overseas businesses.

FinVolution is an integration of finance and evolution, representing better alignment with the range of our businesses, our strategic development and our mission. As a leader in a technology-driven consumer finance space, we will remain focused on our strategies and maximize shareholder value by expanding our core business, enhancing our brand recognition and continuing to invest in technology.

Now I'd like to pass the call over to our Co-CEO, Feng, to discuss the update of our business.

Thank you, Cliff, and hello, everyone. As Cliff mentioned, we have undergone a significant transition. In less than a year, our platform shifted from being mainly facilitated by individual investors to being predominantly facilitated by institutions. To illustrate more details, in the year ago period, our institutional funding partners only facilitated around 14% of total loan originations. While looking at the third quarter of 2019, our institutional partners facilitated more than 75% of loan originations. Notably, since October, all of our loan originations are being facilitated by institutional partners. Today, the number of institutional partners active on our platform have increased to around 30.

During this transition period, we have continued to deliver consistent performance. Overall, loan volume grew sequentially in each of the past 4 quarters with an average growth rate of 14% for each quarter. Our third quarter loan volume grew 66% year-over-year. Our revenues and operating income are both higher by over 30% versus the year ago period. And during this period, our delinquency rates have remained broadly stable despite the ups and downs in the industry and the impact of the microeconomic slowdown.

Our transition has been rapid and smooth and arguably one of the most successful in the P2P industry. This successful operational transformation demonstrates our internal extensive experience, strong execution and management capability. This transition would not have been possible without our institutional partners. Their trust and support in us reflect our value proposition to them and further validate our core capabilities, our experience as well as our broad technology capabilities.

Today, we also announced that we are discontinuing the P2P mode of the business. And going forward, we will focus entirely on servicing and facilitating loans, partnering with financial institutions. Since we have stopped new loan originations funded by individual P2P investors, our P2P related loan balance will continue to shrink. As evidenced by the monthly P2P loan balance figures disclosed on the NIFA website, our P2P loan balance has already decreased by more than half from RMB 19 billion at the end of June to RMB 9 billion at the end of October. The loan tenures on our platform are relatively short, on average, 8 to 9 months. So this loan balance will run off fairly quickly without any new originations.

Based on the current run rate, our P2P loan balance is expected to be completely run off in the first half of next year. We believe this runoff process will be smooth. As a result of these measures we have taken, our exposure to P2P lending is getting smaller. Today, P2P contributes to 0 of our new loan originations. As of October, P2P loans accounted for less than 30% of the total loan outstanding on our platform, and this proportion will continue to fall. Industry and the regulatory developments in P2P lending, therefore, largely have no influence on us anymore.

Fundamentally, the consumer finance market in China is vast and remains under-penetrated. And we are confident that with our experience and capabilities, FinVolution Group is well positioned to connect and facilitate individuals' financing needs with banks and other financial institutions.

With that, I will now turn the call over to our CFO, Simon Ho, who will discuss our financial results for the quarter.

Thank you, Feng, and hello, everyone. We are delighted with our performance, achieving solid operational and financial results in the third quarter as loan origination volume progressively increased, underscoring the strength of our markets and the growth trajectory of our business.

Our non-GAAP adjusted operating income increased year-over-year by a solid 45%, and our non-GAAP operating margin was at a healthy level of 43%.

Our operating margin, however, declined quarter over quarter. This is in line with our expectation and was mainly due to the rapid shift in the funding mix on our platform towards institutions. As we have discussed on our previous earnings calls, loans facilitated by institutional investors have somewhat lower margin than loans facilitated by individual investors. Despite the significant transition we have been through on an absolute basis, our profitability remains very healthy with an operating margin of 43% and an annualized return on equity of 33% in the third quarter.

Our balance sheet also remained solid, with approximately RMB 2.2 billion of cash and short-term liquidity. Notably, our quality assurance fund remains sufficient with a total balance of RMB 6 billion equivalent to 21% of the total outstanding loan principal and interest with quality assurance. Our results demonstrate the resilience of our business model and our ability to adapt to the changing regulatory and market dynamics.

Now let me briefly go over the financial results for the third quarter. In the interest of time, I will not walk through each item line by line on this call. Please refer to our earnings release for more details.

Operating revenues for the third quarter of 2019 increased by 35% to approximately RMB 1.5 billion from RMB 1.1 billion in the same period of 2018, primarily due to the increase in loan facilitation service fees, post-facilitation service fees and interest income from loans invested mainly through trusts.

Loan facilitation service fees increased by 26% to RMB 894 million for the third quarter of 2019 from RMB 708 million in the same period of 2018, primarily due to the increase in loan origination volume.

Post-facilitation service fees increased by 25% to RMB 301 million for the third quarter of 2019 from RMB 240 million in the same period of 2018, primarily due to the increase in loan origination volume and the rolling impact of deferred transaction fees.

Net interest income and loan provision losses were an income of RMB 265 million compared to an income of RMB 16.1 million in the same period of 2018, mainly due to the increased interest income from the expansion in the outstanding loan balances of consolidated trusts.

Non-GAAP adjusted operating income, which excludes share-based compensation expenses before tax was RMB 658 million for the third quarter of 2019, representing an increase of 45% from RMB 454 million in the same period of 2018.

Other income was RMB 80 million for the third quarter of 2019 compared with RMB 251 million in the same period of 2018, primarily due to a lower gain from the quality assurance fund in the quarter.

Net profit decreased by 7.9% to RMB 599 million for the third quarter of 2019 from RMB 650 million in the same period of 2018.

Now turning to guidance. In the last quarter, we guided that we expected loan originations facilitated by institutional partners in the second half of 2019 to be in the range of RMB 32 billion to RMB 38 billion. Having achieved RMB 18.5 billion in loan originations facilitated by institutional partners in the third quarter, we now expect to be hitting the upper half of this guidance range. And for the fourth quarter, we, therefore, expect total loan origination volume to be in the range of RMB 16 billion to RMB 19 billion. This represents a sequential decline in loan volume growth in the fourth quarter, but we expect this to be temporary, mainly due to the drag from our deliberate decision to sharply run down loan originations facilitated by individual P2P investors, which was still 1/4 of our loan originations in the third quarter.

In addition, a smaller secondary factor is seasonality that the fourth quarter traditionally is a tight liquidity period for our institutional partners, such as commercial banks that have to meet certain liquidity ratios at the end of the year. We are fully confident that this is only a temporary slowdown and that volumes will recover in the new year. Our institutional partner pipeline remains solid. And we are presently in active discussions with over 10 potential new partners.

Looking forward, our strategy remains committed to and focused on consumer finance. The market in China is vast and under-penetrated. On the other hand, the demand from financial institutions for our services is also huge and growing. Our core capabilities position us well to facilitate borrowers and financial institutions and enjoy the benefits of this vast opportunity. We are focused on deepening our cooperation with financial institutions, leveraging on our extensive experience and proprietary technology. We are also committed to our international expansion with our initial focus on Southeast Asia.

With that, I will conclude my prepared remarks, and we will now open the call to questions. Operator, please continue.

(Operator Instructions) The first question comes from Sanjay Sakhrani of KBW.

This is actually Steven Kwok filling in for Sanjay. My first question is just around management's commentary around expansion overseas and also providing technology to financial institutions. Can you guys elaborate on that? And over time, how should we expect that to ramp up and the impacts on the P&L?

Sure. On the international front, we started operating in Indonesia since the beginning of this year, and we have recently applied to become a fully licensed P2P lender under Indonesian regulations. And we hope to have a favorable result before the end of the year. So the business is young, but we'll definitely report back with further updates going forward. Philippines is another market we have started operating recently as well. And we are also looking into other Asian markets, such as in India and in Vietnam as well.

With regards to the financial institutions, this is pretty much an extension of the work we're doing on the funding side. We are partnering with many licensed financial institutions for the -- obviously, to help loan facilitations on the platform. At the same time, many of them are deficient or do not have the full suite of capabilities for consumer finance. And we are also in there to help them to build their own capabilities in whether it's risk management, savings and loans, fraud detection, and we are going in to work with them to implement these capabilities in-house. So this is a big part of our strategy going forward to work more deeply and closely with financial institutions. Does that answer your question?

All right. Yes, it does. And as a follow-up, just around the revenue yield, you talked about how the decline is attributable to moving more to the institutional side. Should we expect this to be the run rate going forward? Or are there any further impacts given that your funding still had a component of the retail side in the third quarter?

Yes. So obviously, the -- our loan volume grew sequentially by 14%. Revenues softened a little, declining by around 3% quarter-on-quarter. This is really a direct reflection of the lower margin, lower take rate of the loans facilitated by institutions and also the rapid ramp-up in institutional funds in the third quarter from 45% to 75% of total volume in the -- from Q2 to Q3. I do think -- I think most of the take rate decline is behind us. And Q3, I would think, is a good reflection of our take rate revenue margins since our platform was already majority funded by institutions in the third quarter.

(Operator Instructions) The next question comes from Yiran Zhong of Crédit Suisse.

Congratulations on your latest transformation. And I just have a few questions on the latest institutional funding partners. Can you please provide the latest update on the current partners that we're working with? How many currently versus -- 3Q versus 2Q? And any changes in the split between the banks and other types of institutions?

And secondly, what's the customer acquisition cost in 3Q? And how is the trend looking so far in Q4? And also finally, in the -- in 3Q, the fair value changes from financial guarantee derivatives, RMB 43 million. I wonder what's driving that number?

Sure. Thanks, Yiran. I'll first address the institutional break -- funding breakdown. There has been a continued shift towards working with banks and consumer finance companies. And -- I mean, presently, we are roughly in terms of loan volume, about 80% of our lending volume -- loan origination volume is being facilitated by banks and consumer finance companies. The trusts are roughly about 15% and other financial institutions would be roughly about 5%. So we have continued to shift further towards working with banks and consumer finance companies. I would think that we are now at more of a steady state in terms of the proportions, and probably, wouldn't expect to see significant shifts from here in the near term.

The banks that we work with, and this is a common question, they are primarily midsized banks and city commercial banks, that continues to be the case from previous quarters. The number of the financial institutions that we partner with, I believe, in the previous quarter, we said it was over 20, and I think that was the guidance -- that was the comment we made in the last quarter. And this quarter, we said it's around -- it's about 30 institutional partners that we work with actively. And we have a good pipeline of another 10 that we're actively in discussions with.

With regards to customer acquisition cost, the customer acquisition cost per successful borrower -- per new borrower -- successful new borrower was around RMB 220 in the third quarter. In the previous quarter, this was about RMB 190. And the increase was expected, and we guided for this in the previous quarter because there's been an ongoing shift in the mix of new borrowers towards the higher quality -- higher credit quality segment, which we're targeting. And this segment has somewhat higher acquisition costs. Now looking into the fourth quarter and looking at the trends that we see at the moment, I think this acquisition cost per new borrower should be relatively broadly stable in the fourth quarter. We're not seeing huge pressures at the moment.

And finally, your question on the fair value changes that are in our P&L and income statement, you have to -- I think the way to look at it, there are more numbers around this in the third quarter. So this is the realized -- there was a realized loss from financial guarantee derivatives of RMB 37 million, and there's a fair value loss of RMB 43 million in the fair value change of financial guarantee derivatives. You really should be looking at these 2 line items together and netting it off. The financial guarantee derivatives, if you go back in time and memory, these relate to a second investor protection reserve fund that we used to run. It's called the investor reserve fund, and we discontinued this in -- at the end of 2017. So what you're seeing these -- is the gradual maturity of these investment programs that this IRF, this investor reserve fund, was protecting. And during the quarter, there were more maturities happening, and hence, you see slightly larger numbers, but you really should be looking at a net basis. And on a net basis, you will see that the number has been -- the net result hasn't changed much versus previous quarters. I could walk through over this with you in further detail separately if you're interested.

(Operator Instructions) The next question comes from Alex Ye of UBS.

I have a few simple questions. Firstly, is on the loan tenure. So it has continued to decline a little bit to around, I think, more than 8 months. So was just wondering, is that a deliberate strategy you are taking? And how should we expect this to change going forward?

And second is on the -- so about the per borrower acquisition. So you have mentioned that our per borrower acquisition cost has increased as expected because we are moving toward the higher-quality customers. And going forward, how should we expect the trend on your customer acquisitions? So if we are moving further towards the higher quality borrowers? Or are we comfortable with the current segment?

That's number two. And finally, just would like to have an update on your share repurchase scheme? And would be great to have your thoughts about your capital return plan regarding dividends and share repurchase scheme.

Okay. Thanks, Alex. Yes, the loan tenor shortened slightly to the lower end of 8 to 9 months, I mean, the lower end of that range. It's not a deliberate strategic shift. It's mainly because we -- certain financial institutions that we partner with, their preference is of the shorter tenors. So it's really driven by the preference by some of the institutional partner that we're working with.

With regards to your question on customer acquisition cost, the trends and the segment we're working with. Yes, we do have plans, obviously, in the coming year to further expand towards or -- towards the -- even better quality -- credit quality segment. And the customer acquisition cost will obviously shift as well in that regards.

In the near term, though, we don't see much pressure in what we're doing, but there may be some shift as we go into 2020. And -- but bearing in mind, as you work with a different segment, you're dealing with different profiles, different ticket sizes potentially, different credit -- better credit risks. So I think you really have to look at the whole package in totality at the end of the day.

And finally, your question on share buybacks and capital management. We still have an outstanding buyback quota of USD 51 million, and we will continue to approach our buybacks opportunistically, and we'll take into account, of course, our operational needs. Given that there is a certain degree of capital intensity dealing with this -- the institutionally facilitated model that we're running at this moment. In terms of dividends, our stance on this is the same as in previous quarters, that it isn't our intention to pay dividends each year. But of course, this is subject to review at the end of the day by the Board. And we will also take into account of the capital needs that we have in our business model. So that remains unchanged.

(Operator Instructions) The next question comes from John Cai of Morgan Stanley.

I dropped off accidentally previously. So I'm not sure if this is repetitive questions. But would like to have a breakdown of the revenue pipeline and [tranche]. So what portion of the revenue is contributed by P2P funding versus tranche funding versus other institutional funding? And if possible, can the management provide the loan balance as of end of the Q? And what is the latest number or what is the outlook about the outstanding loan balance?

And also on the risk, so I've seen that we -- our risk performance is stable. So against the effective trend that some players outside are analyzing risk and our own transition is essentially going down the risk of totally lower risk borrowers. So is there any colors behind how stable this performance is? Is that a net-net results? Or how should we understand that?

And a related question is our current customer base, if we need to compare them with like maybe 2 quarters ago when our funding in mostly P2P. Do we see a significant change of our borrower base or maybe the outstanding loan per borrower, does that change significantly when we're trying to do more institutional funding?

Yes. John, thanks for your questions. Regarding your first question, revenue breakdown. You could -- you can see it clearly from our income statement, the contribution from trusts, that is the net interest income and provisions -- loan loss provisions item on the revenue side. But for the loan facilitation, post-facilitation fees, I would really encourage you to -- I think I would encourage the market investors to look at it in totality, because in the last quarter, we were pretty much predominantly driven by institutional funding partners. And as we said previously that the sort of the take rate dynamics that we saw in the third quarter is, in our view, a -- probably a pretty good reflection of what it will look like going forward. So I think we're pretty comfortable with where -- what we see in that front. The loan outstanding balance as of the end of the third quarter was RMB 35 billion. And the outlook of this is it's clearly, I think, fourth quarter, we may see some softening as we've guided to loan origination volume -- total loan origination volume in the fourth quarter will be a little bit soft for temporary reasons. And at the same time, because we are also running off the P2P loan balance, obviously, still quite rapidly, so that will be a near-term drag as well. But we're confident, I mean, past this stage as transition period that's coming to an end, we could deliver healthy growth going forward.

Your question -- your next question is around credit risk delinquencies, and you've noted that delinquencies were generally stable in the third quarter and continued to perform within our expected range. In the short term, in the fourth quarter, there could be some up -- small upward pressure, mainly on the back of the tightening of loan collection and data practices across the industry. But overall, we believe this is manageable. And we expect our delinquency rates, as you mentioned, to be structurally improving due to our shift towards a better quality borrower segment relative to the past. So I think, structurally, the direction is still for improvement. Although in the fourth quarter, I mean, there is obviously a bit of pressure from what's happening in the industry.

And finally, with respect to the outstanding loan per borrower, we -- I don't think we've seen significant shifts. The -- this segment, we may be first-time borrowers. We are lending at slightly larger than before, but I think in broad terms, no significant difference from previously. Does that answer your questions, John?

Yes. So on the overall borrower base, so now we have -- predominantly funded by institutions, how does the borrower, let's say, overlap with our historical borrower base, which is mostly funded by P2P? Is -- do we see a significant change of the borrower base or composition?

There's some overlap. There's some overlap, but we're also adding on new borrowers. So it's a combination of both. I don't have specific numbers in front of me, but it's both. As you can see, we are acquiring new customers in the market. So -- and these are, obviously, the segment -- the target segment that we're working on.

(Operator Instructions) The next question comes from Jacky Zuo of China Renaissance.

Actually, just a follow-up on John's questions regarding to the borrowers. As we actually move into better quality borrowers, just want to get some evidence, because previously, we actually provide a breakdown of our borrowers in terms of different risk level. According to our risk management system, I just want to get a -- roughly a breakdown of the change of the lower risk borrowers in the recent quarters? And I think a related question is, in terms of borrower acquisition channels, what has been the change of -- in the process when we move into better quality borrowers? That would be very helpful.

Sure. Jacky, I think you're right. We -- there's been a significant upshift in the credit ratings of our borrowers. Previously, as you all know, we have 7 levels of -- or 7 credit ratings for approved borrowers, Levels 1 to Level 7, where 1 is the highest quality and the 7 is the lowest or the highest -- or the lower quality, it's the higher delinquency rates, and that's a better characterization. 1 is low delinquency rate, 7 is the highest. Previously, I think if you look back 18 months or 18, 24 months ago, we were primarily lending, operating in sort of the levels maybe 4 and 5 -- 4, 5, 6-ish, sort of -- that sort of the bell curve, the concentration. We -- currently, I think we are mainly servicing segments, 2, 3, 4 is the vast majority of our loan originations today. So there has been a sizable, significant shift in that mix.

And sorry, Jacky, I missed your final -- the last part of your question, would you mind repeating it?

Yes, Simon, it's about the borrower acquisition channels. So what are the changes because we want to acquire better quality customers?

Yes. So the channels have -- obviously has shifted a little -- have shifted somewhat. And to reach sort of our target segment of borrowers, we have shifted towards using more -- putting on more advertising on social media channels such as using WeChat more. Our app stores have also been a very key and significant channel for us as well. So we have shifted towards using more social media types of channels as a result.

(Operator Instructions) As there are no further questions now, I'd like to turn the call back over to Jimmy Tan for closing remarks.

Thank you, once again, for joining us today. If you have further questions, please feel free to contact Paipaidai Investor Relations through the contact information provided on our website or in our press release.

This concludes the conference call. You may now disconnect your line. Thank you.