FinVolution Group (FINV) 2020 Q4 法說會逐字稿

Hello, ladies and gentlemen, thank you for participating in the fourth quarter and full year 2020 earnings conference call for FinVolution Group. (Operator Instructions) Today's conference call is being recorded.

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

Hello, everyone, and welcome to our fourth quarter and full year 2020 earnings conference call. The company's results were issued via Newswire services earlier today and are posted online. You can download the earnings release and file for the company's e-mail alerts by visiting the IR section of our website at ir.finvgroup.com.

Mr. Feng Zhang, our Chief Executive Officer; and Mr. Jiayuan Xu, 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 risks 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 obligations 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 CEO, Mr. Feng Zhang. Please go ahead, sir.

Thanks, Jimmy. Hello, everyone, and thank you so much for joining us today. First of all, on behalf of FinVolution, I would like to express my sincerest appreciation to our shareholders and stakeholders for all of their support over the past year. 2020 was an extremely unusual year with enormous challenges.

However, despite the economic uncertainties created by the pandemic and the fast-evolving regulatory environment in which we operate, I'm proud to say we have done remarkably well. By strategically shifting to better quality borrowers, we delivered a solid financial performance over the past year. With the clearance of P2P balances in 2020 behind us, our focus for 2021 will be on resuming high-quality growth.

After a strong recovery in the third quarter, we continued on our upward trend in the fourth quarter, helping us close the year on a strong note. For the fourth quarter, our average IRR was 26.4% with loan origination volume increased by 24% from the previous quarter to RMB 21 billion, exceeding the top end of our guidance range of RMB 20 billion. We attributed these gains to our strong strategic execution, our industry-leading technological capabilities and our sophisticated and prudent approach to risk management.

We have successfully completed our strategic transition towards better quality borrowers as evidenced by the significant improvement in our delinquency levels. Equipped with our framework for enhanced risk assessment and management, we were able to continue decreasing our funding costs while simultaneously increasing the number of institutional funding partners allowing us to maintain ample, diversified and stable funding sources on our platform. It is encouraging to see our strong growth momentum continue as we entered into 2021.

Bolstered by our prudent approach to risk management and our industry-leading risk management capability, we saw further improvement on multiple key risk metrics. For example, our day 1 delinquency rate was 5.2% in February 2021, compared to 12.5% during December 2019 before the COVID-19 outbreak, primarily due to our transition towards high-quality borrowers and effective risk management capabilities.

Our vintage delinquency rate is expected to fall below 3% in the fourth quarter compared to around 6% in the same period in 2019. Going forward, we expect our vintage delinquency rates to maintain at similar levels in 2021.

Notably, our 30-day loan collection recovery rate continued to stabilize at over 90%. Portfolio vertical delinquency rate for all outstanding loans on our platform is also at a new historical low. For example, delinquency rates that are 15 to 89 days past due improved to 1.38% compared to 5.6% in the same period last year.

On the funding side, funding on our platform remained stable and ample with growing numbers of institutional funding partners. The number of our funding partners increased steadily to over 50 as we continued to attract new partners on board. Our quality assets have spurred strong demand from institutions to facilitate loans through our platform. With our strengthened risk management capabilities as well as better credit profiles of borrowers, we further lowered funding costs. The cost of funds on our platform fell to 7.5% in the fourth quarter compared with 10% in the same period last year.

With regards to the CBIRC's notice on further regulating commercial bank's online lending business, the new restrictions are focusing on the joint lending model. We do not rely on the joint lending model to operate our business. Instead, we are empowering our financial institutional partners through a loan facilitation model in which funding partners provide 100% of funds for loans to borrowers. As our funding partner is highly diversified with a mix of Internet banks, private banks, consumer finance companies and trust companies, the new CBIRC regulation's impact on our domestic online lending operation is minimal.

Now I'd like to share a little more about our new strategic initiatives, specifically on how we plan to leverage our technological capabilities and the industry know-how to prepare further growth for our company. Powered by our strong technological capabilities and credit risk assessment framework, we have also diversified our loan business into the microenterprise segment. In 2020, we originated RMB 3.7 billion in loans to over 220,000 microenterprises. This year, we plan to extend such loan facilitation services to further cater to the operating needs of small businesses. We believe offering financial support for MSE will help fuel the growth and prosperity of the overall economy, which is also in line with the regulatory guidance in China.

In 2020, our microenterprise loan volume accounted for around 6% of our total loan volume, and we expect this portion of our business to account for about 20% of our loan origination volume in 2021.

Our international expansion is progressing rapidly with Indonesia market leading the growth. Our Indonesia operations, which today represent the majority of our overseas business, gained further traction with better-than-expected loan volume growth. Loan origination volume for Southeast Asia in the fourth quarter increased by 100% to RMB 535 million compared to the previous quarter. Over the past 2 years, we have obtained a peer-to-peer lending license from the Financial Services Authority of Indonesia and a capital market services license from the Monetary Authority of Singapore.

These developments are significant for us as we believe that Southeast Asia will be a fast-growing market. We will continue to harness state-of-the-art technology as well as our deep industry expertise and experience to make financial services more accessible for users in the region.

In light of evolving market dynamics, our business remains solid with strong loan recovery growth that started in the third quarter of 2020. The performance was supported by our technological capabilities and effective execution of our plan and strategy. With a successful transition to higher-quality borrowers, we now expect our loan volume to be in the range of 100 to RMB 120 billion in 2021, representing an increase of 56% to 87% year-over-year.

In summary, our resilient performance in 2020 laid a solid foundation for us to drive further growth. Looking ahead in 2021, we remain dedicated to controlling credit risk with our technological capabilities. Given on our proven track record in technology, innovation, prudent risk management and responsive measures taken to navigate challenging economic and credit cycles, we are well positioned to capture the immense potential in China's consumer and microenterprise markets as well as Southeast Asia's fintech markets to deliver long-term value for our shareholders.

With that, I will now turn the call over to Jiayuan Xu, who will discuss our financial results for the quarter.

Thank you, Feng, and hello, everyone. In the fourth quarter, amid the recovering COVID-19 environment in Mainland China, we delivered non-GAAP operating profit of RMB 593 million, representing an increase of 34% year-over-year and further demonstrating the resilience of our core business model. Our balance sheet remained strong with RMB 4.6 billion in unrestricted cash and short-term liquidity.

Leveraging our strong technology capabilities, we look to capture new opportunities arising from consumer finance markets both in Mainland China and Southeast Asia as we continue to expand and deepen our relationships with business partners.

Now turning to the financial results for the fourth 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.

Net revenue for the fourth quarter of 2020 increased by 50% to about RMB 1.85 billion from RMB 1.23 billion in the same period of 2019, primarily due to the adoption of ASC 326 at the beginning of the year and the increase in loan volume.

Loan facilitation service fees increased by 19% to RMB 643 million for the fourth quarter of 2020 from RMB 539 million in the same period of 2019, primarily due to the increase in loan origination volume, which was partially offset by a decrease in the average rate of transaction fees.

Postfacilitation service fees decreased by 36% to RMB 176 million for the fourth quarter of 2020 from RMB 276 million in the same period of 2019, primarily due to the decline in outstanding loans serviced by the company and the rolling impact of the deferred transaction fees.

Guarantee income was RMB 667 million for the fourth quarter of 2020 due to the adoption of ASC 326.

Net interest income decreased by 36% to RMB 204 million for the fourth quarter of 2020 from RMB 317 million in the same period of 2019, mainly due to the reduction in the outstanding loan balance of consolidated trusts.

Other revenue increased by 60% to RMB 162 million for the fourth quarter of 2020 from RMB 101 million in the same period of 2019, mainly due to increased customer referral fees to third-party service providers.

Non-GAAP adjusted operating profit, which excludes share-based compensation expenses before tax was RMB 613 million for the fourth quarter of 2020, representing an increase of 38% from RMB 445 million in the same period of 2019.

Net profit was RMB 497 million for the fourth quarter of 2020, representing an increase of 21% compared to RMB 413 million in the same period of 2019.

Our core business model is based on the loan facilitation model whereby the institutional funding partners on our platform provide 100% of the funds for loans to borrowers, and our draw is to provide value-added service to the funding partners as well as provide borrower access to credit.

We have a well-capitalized balance sheet, and our leverage is conservative. If you divide the total outstanding loans on our platform of RMB 26 billion by our shareholders' equity, the leverage ratio across the business was only 3.2x. And our liquidity position remained strong with about RMB 4.6 billion of unrestricted cash and short-term investments at the end of December 2020.

Our strong balance sheet enables us to be well positioned in the current environment and gives us significant flexibility.

We have continued to return value to our shareholders through dividends and share buybacks. In the fourth quarter, we have deployed USD 30 million to buy back our shares. As of December 2020, we have cumulatively deployed USD 129 million on buybacks.

Our Board has also announced a dividend of USD 0.17 per ADS for fiscal year 2020 for our shareholders. This is our third consecutive dividend declaration, which reaffirms our confidence in our business model, our core capabilities and long-term market potential. Since we began our share buyback and dividend initiatives in 2018, we have cumulatively deployed USD 272 million in this regard.

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 Han Wang with 86Research.

(foreign language) Let me translate my questions. My first question is regarding on the Hong Kong secondary listing. So any plan or timetable for that would be helpful.

My second question is on take rate. So will we continue to reduce take rate in 2021?

And last question is about our overseas business. So how we measure the TAM in Southeast Asia? And what will be the proportion of the overseas business in terms of [facilitation] volume in the next several years and with our primary business model and how we manage risk in the area, assuming the user profile is different.

(foreign language)

[Interpreted] Okay. We have made the requirements for a secondary listing on the Hong Kong Stock Exchange, and the company is still exploring the possibility as this is still very early stages. We will only update the market when we have further updates from our side.

(foreign language)

(foreign language)

[Interpreted] Okay. Let me do the translation first. Okay. Let us recap the regulator stance on pricing. The 4x LPR only applies to private lending and is not applicable for us, and our business is conducted using the loan facilitation model. And from this perspective, we have the flexibility to adjust our pricing. However, the decision for price adjustment is dependent on several factors, such as the economic development, the level of customer satisfaction and the level of delinquency rates, et cetera. We will need to consider all these factors before making any changes.

(foreign language)

[Interpreted] Okay. Apart from pricing, we also need to consider other factors such as the risk and our funding costs. For example, we have already shared with the market that our funding cost is expected to be below 7.5% and our risk is expected to be below 3%. And from the take rate point of view, we are confident to maintain the current take rate at 4% as we have the capabilities to reduce funding costs and further improve delinquency rates.

This is Feng. I will just quickly add, the 4% number, if you do the calculation, if you do the math, it is basically based on our current pricing, which is between 26% to 27% and 7.5% funding cost and about 3% loss. So it is based on these numbers. They come out with a take rate of 4% -- about 4%. Now as Jiayuan has mentioned, the regulation has clarified that -- the Supreme Court has clarified that the 4x LPR pricing cap doesn't apply to our business model. So in that case, we do have flexibility and we do have room to further adjust our pricing upward or downward, if needed upward on the take rate side. I would just add that color.

(foreign language)

[Interpreted] Okay. Let us recap on the situation in Southeast Asia. Our Indonesian market is leading the growth, and we have also ventured into other countries such as Philippines and Singapore. We will continue to keep abreast of the local regulations developments and keeps our operations within the limits of the regulatory requirements. For example, we already have a P2P license in Indonesia and our average loan tenure is between 1 to 2 months.

(foreign language)

[Interpreted] We will continue to expand our market share in Indonesia as we think there is a lot of potential in Indonesia. It is just like China from a few years ago.

(foreign language) Let me translate my question. So what are the main competitors in the Southeast Asia market in terms of the loan facilitation business model.

(foreign language)

[Interpreted] The Indonesian market is still at a very early stage, and we do have the confidence and capabilities to replicate our success in China over in those Southeast Asian markets. And by the way, I just want to add on that we are constantly among the top 3 fintech apps in the Indonesian market.

Our next question is from Alex Ye with UBS.

(foreign language) I will translate my question. I have 3 questions, first one is on our loan growth outlook. So the loan growth guidance of RMB 100 million, RMB 120 billion loan volume for 2021 was very strong growth. So I'm wondering how do management plan to achieve that growth because it looks like our new customer growth momentum is still haven't returned to a very high level yet and I'm wondering do we plan to like reactivate our old customers and increase the contribution from a higher ticket size to deliver that strong growth?

My second question is on your MSE loan target. So management mentioned that you are going to raise the MSE loan contribution to 20% in 2021. So could you share with us the -- some of the characteristics of this kind of MSE loan, including ticket size, IRR, vintage loss and your customer acquisition channel? And in addition, how does the risk-adjusted return of that MSE loan compare to your consumer credit?

And finally, on your customer acquisition cost that has been rising the past few quarters. So that was partly driven by higher quality customers acquisition strategy. I'm wondering whether that kind of a high customer acquisition cost is sustainable in the future?

(foreign language)

[Interpreted] In order to achieve the target of between RMB 100 billion to RMB 120 billion, we need both new and old customers. For example, in the fourth quarter, our new customer was around 370,000 and this is a 50% increase compared to the 3 quarters and already at similar levels compared to the fourth -- same period of 2019. And actually, in December, this level is actually going down for us and we expect the trend to continue into 2021.

(foreign language)

[Interpreted] Okay. The new customers are more acceptable to our brand as we realize that there are actually more registration actions from these new customers.

(foreign language)

[Interpreted] We have also seen similar trends with our old customers. As we have noticed, their repeat borrowing rate has actually increased.

(foreign language)

[Interpreted] Our growth in the past 2 years has been slow. But prior to 2018, we have enjoyed very rapid growth. During the last 2 years, we have been occupied with the P2P exit and the transition to better quality borrowers. We have successfully achieved both of these targets. And both -- since both of these targets has been complete, we have the ability to resume high-quality growth in terms of loan origination volume.

(foreign language)

[Interpreted] We have been acquiring our new customers through a diversified of online and off-line channels. For the online channels, we are acquiring them through information feed channels.

(foreign language)

[Interpreted] Our customer acquisition costs in the fourth quarter on a CPS basis is RMB 500-plus, similar to the level in Q3. But do remember that the fourth quarter was also impacted by the single-stage event.

Yes. And going forward, therefore, Q4, the costs will be a little bit higher because of the e-commerce. They have a lot of advertisement because of the year-end events. And we are confident going forward that our CPS marketing costs will be controlled at a similar level. And given the better quality borrower base and lower loss rate as well as lower funding costs, such a CPS level, we think it is very healthy for our business model.

Yes. So I will add, trying to answer the second question. Yes. So our SME line of business, their target customers mostly are those mom-and-pop shop owners like in Chinese (foreign language) and our ticket size range from a few thousand to mostly like -- to RMB 50,000 with an average around RMB 10,000 is in the range of 18% to 27% and slightly lower than our average borrower. There we have seen like better risk quality for these customers on average. We estimate their loss rate to be probably like 1% lower than our stand-alones.

So the profitability, we expect, given the slightly lower price -- their price is a little bit lower and also lower delinquency rates. We expect same risk-adjusted margin and the same return.

So in terms of -- yes, I think that's probably all the things you asked, right? Yes, thank you.

Next question is from Jacky Zuo with China Renaissance.

(foreign language) I have 2 questions. Number one is about the borrowing demand. Just want to check what is the business trend you see from the borrower side in the first quarter. And we see some additional borrowing demand from our end users, given we've seen from the news that Ant is cutting the credit line for these users?

And second question is on the funding side. We see some of our peers exploring the profit sharing model with the funding partner. So just want to check whether -- what is our progress on the profit sharing model?

(foreign language)

[Interpreted] Okay. The demand is very strong based on our loan origination volume guidance in 2021, and also our Q4 loan volume guidance exceeded the top end of our guidance in Q3. And these are due to the support from our old customers and our new customers.

(foreign language)

[Interpreted] We do not have 100% confirmed data if these users are from the Internet giant, but we are able to indirectly estimate some of the overlaps with other players in the market. For example, we have conducted samples of these with results reflecting that demand has not been fully satisfied.

(foreign language)

[Interpreted] There is no specific guidance from the regulators regarding the capital-light or risk-sharing model.

(foreign language)

[Interpreted] From the company's perspective regarding the capital-light model, we will need to consider several issues such as leverage ratio, cash positions and unit economics, et cetera.

(foreign language)

[Interpreted] And at this moment, the risk-bearing loan facilitation model is more suitable for us.

(foreign language)

[Interpreted] With that being said, this does not mean that capital-light model is not important for us. In fact, the capital-light model is one of our priority in 2021 and growing the numbers of institutional partners working with us in that capital-light business remains our top priority.

(foreign language)

[Interpreted] As you know, we already have over 50 institutional partners working with us. And most of these institutional partners operating under the risk-free model are also our institutional partners. This is why we believe that we have the fundamental trust and support if we were to venture into the capital-light models with them.

(Operator Instructions) The next question is from Henry Liang with Gold Dragon.

Sorry, just muted. (foreign language) So basically, congrats on the good results. And it's pretty surprising to see like order metrics, volume, profitability doing so well. Just wonder, can you guys explain what's really behind our transition and all the fantastic metrics. Can you share what is our core competitiveness?

(foreign language)

[Interpreted] Okay. First of all, we have over 13 years of operating history. And if you take a look at 2 years ago, our business is actually growing very rapidly. But during the past 2 years, we have been occupied with the P2P exit and the upgrade to better quality borrowers, okay?

(foreign language)

[Interpreted] We managed to transform because the team has the foresight, the ability to execute swiftly and the core capabilities in the risk technological management. And with all these capabilities, we are able to transform very rapidly compared to most of our peers.

(foreign language)

[Interpreted] One, for example, we have upgraded our borrowers successfully from the sub-prime borrowers that we used to do in the P2P era to the better quality borrowers today. This is not only because of our capabilities in data and risk management.

(foreign language)

[Interpreted] Our transition has basically comes to a temporary stop and now we have resumed our focus on resuming our growth. And based on our past track record, we have proven to the market that we do have the capability to resume growth rapidly.

(foreign language)

[Interpreted] We have also proved to the market that our capabilities and technologies are transferable not only in China, but also on the international market. And this means that we are able to replicate our experience in China to the international markets.

Henry, this is Feng. I think Jiayuan has said pretty well. I want to add a little bit more color. I think there are a couple of things. One is our company -- I think what set us apart from a lot of other players in the market is we have really strong risk culture. And we put a really high focus or emphasis on keeping like the risk at our targeted level, and we don't sacrifice risk for growth. The one thing that I can share is our President -- our current President was the Chief Risk Officer of the company before I joined the company in 2015. And I joined the company as the Chief Risk Officer. And now I'm a CEO of the company. So that kind of give you the color of how the -- how important is the risk in our management's focus. And that's why given a good risk track record, we have a very smooth exit of P2P and we have a very smooth transition to institutional funding facilitation model.

We also emphasize a lot on technology. We continue to invest in technology as we believe that is the key competitive advantage for long-term success in this fintech market -- segment -- in this fintech business.

And then, finally, we have a very strong team.

So I think it is why you see like, hey, suddenly, you see like risk is good and growth comes, I think it really is a groundwork of -- the result of many years of groundwork. We set our strategic goal of -- direction for better quality borrowers, for institutional facilitation model more than 2 years ago. And we are seeing like the fruits today, and we believe we will see even better going forward. So it is really a combination of, we think, good strategic planning and strong execution.

(foreign language) Yes. So thanks for the very insightful sharing. And just a very quick follow-up. One is like what is our marginal funding cost that we can negotiate with the new funding partners in the current situation?

And secondly, how much of this growth in our top line volume can be transitioned into the profit growth like earnings or net take rate?

(foreign language)

[Interpreted] Okay. The funding side remains ample. We already have 10 to 15 partners in our pipeline, and we believe there is further room for improvement in the funding side.

(foreign language)

[Interpreted] However, funding cost is only 1 factor. We would need to consider other issues such as funding partner's ability, the level of customer satisfaction and more. However, at the current moment, our priority is not to have the lowest funding cost but to find the most appropriate partners to support our high-quality growth.

(foreign language)

[Interpreted] Okay. We have given our loan origination guidance and we have also given our take rate guidance of around 4%. So if you do a calculation, you would be able to have a sense of how much revenues that we are going to have.

(foreign language)

[Interpreted] However, from top line to bottom line, there are several factors influencing this. For example, customer appreciation is one of them and we need to recognize these costs upfront.

(foreign language)

[Interpreted] Customer -- new customer acquisition is not purely a cost for us. If you understand us, you know that new customers is required for growth. This is why we view new customer acquisitions as a form of investment, okay.

(foreign language)

[Interpreted] Therefore, we will maximize -- we will try to maximize the acquisitions of new customers on our side.

(foreign language)

[Interpreted] Another factor influencing the bottom line is the accounting.

(foreign language)

[Interpreted] And because of these 2 situations, it will cause some [deviation] from top line to bottom line when doing the calculations.

(foreign language)

[Interpreted] We are still committing to maintain a steady growth in the bottom line trend.

This concludes our question-and-answer session. I would now like to turn the conference back over to the company for any closing remarks.

Okay. Thank you, everyone, for joining our call tonight. If you have any further questions, feel free to reach out to the IR team tonight.

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]