FinVolution Group (FINV) 2022 Q1 法說會逐字稿

Hello, ladies and gentlemen, thank you for participating in the First Quarter 2022 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 first quarter 2022 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 the prepared remarks and conclude with a Q&A session.

During this call, we will be deferring 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 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 CEO, Mr. Feng Zhang. Please go ahead, sir.

Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. Due to the lockdown in Shanghai, our management team are dialing in from their homes, so please bear with us if we encounter any technical difficulties during the call.

We're happy to speak with you today following the successful completion of another strong quarter against multiple headwinds. Since March 2022, Shanghai has been under lockdown due to the pandemic and similar lockdowns have been imposed upon additional cities in recent weeks. Furthermore, other fluctuations affecting 2021's macro environment persisted through the first quarter of 2022 and have affected certain aspects of our business operations. However, our strong technological foundation and strategic transition towards better quality borrowers enable us to flexibly navigate challenges and deliver solid, consistent first quarter results. Highlighted by our eighth consecutive quarter-over-quarter growth in total transaction volume, in line with our expectation, we achieved record-setting total transaction volume of RMB 39.7 billion this quarter, representing a year-over-year increase of 48% and a sequential increase of 2%.

Now let me share some other major achievements for the first quarter. As we relentlessly and skillfully executed our strategy to apply better quality borrowers, transaction volume originated for new borrowers surged to RMB 6.4 billion, an increase of 14% year-over-year. Notably, our total outstanding loan balance also increased to RMB 53.8 billion as of March 31, 2022, representing an increase of 66% year-over-year and 7% sequentially.

Thanks to our progressive shift towards better quality borrowers, our ever-evolving credit risk assessment and our self-developed proprietary technologies, such as [Platform 9 3/4] and (inaudible) visualized loose engines, we have stabilized our risk metrics at (inaudible) low levels while continuously growing our transaction volume. Platform 9 3/4 is an algorithm learning system, which combines automatic model design, deployment and the management end-to-end one-step platform that requires just 100 seconds to acquire relevant resources and implement new model for credit risk assessment, increasing our efficiency tremendously. (inaudible) enables us to swiftly make efficient and appropriate adjustments on complex and iterative operating rules, saving us over 50% in both maintenance cost and time.

Supported by our cutting-edge technologies and a prudent management framework, our recent day 1 delinquency rate in the first quarter of 2022 further improved to 5.3% from 5.6% in the fourth quarter of 2021. However, since then, due to pandemic-related lockdowns, this metric has increased slightly to 5.5% but still within expectations.

As our loan collection team is largely based out of Shanghai and spread across several cities, our loan collection recovery rate in May remained strong at above 90%. Our delinquency rate below 90 days remained low at 1.56% compared to 1.61% in the previous quarter.

Our vintage delinquency rates have remained stable for the past several quarters. However, considering the impact of the COVID resurgence in China, we now expect our vintage delinquency for the first quarter to be around 2.4%. In the meantime, we will continue to closely monitor the risk performance of both existing and newly originated loans.

The impact of the pandemic is manageable for us as we have been implementing preemptive measures such as strategically reducing loan transactions in riskier regions and pricing the approval rate for sectors such as food and beverage, which have been badly affected by the current lockdown.

Our ongoing transaction to better quality customers has been validated by the increased proportion of our category A and B borrowers, which accounted for 68% of our total borrowers in the first quarter compared to just [50%] in the same period last year. Furthermore, the percentage of loans facilitated at or below IRR 24% increased to 84% in the first quarter, up from 78% in the previous quarter and from just 40% a year ago.

On a separate note, for borrowers who lost their short-term repayment capabilities due to COVID, our customer service team is providing additional assistance for them to help them tide over this difficult period. We are confident that our industry-leading digital capabilities and in-house developed technologies will empower us to overcome this challenging period while achieving regulatory compliance.

While sustaining our strong growth trajectory over the quarter, we also advanced our strategy to optimize our overall funding structure. As we continue to augment and refine our mix of funding partners, we have diversified our platform responding sources while ensuring they remain stable, secure and ample. To date, we have cumulatively cooperated with over 60 financial institutions across different provinces and continue to cultivate a robust funding cost line.

Alongside our substantial progress in our consumer finance business, we also maintained a solid growth momentum in our operations aimed at empowering small business owners. During the quarter, we served over 507,000 small business owners across multiple sectors, such as retail, wholesale and service industries, among others, representing an increase of 66% from the same period last year, while the segment transaction volume increased 123% year-over-year to a record high of RMB 9.8 billion, contributing 25% of total transaction volume for the quarter.

Our dedication to providing small business finance is strongly aligned with the government's objective of promoting quality financing access for SMEs, especially in the aftermath of the global pandemic. Going forward, we will remain focused on our efforts to assist the small business, reaffirming FinVolution's commitment as a responsible corporate citizen.

Turning now to our international expansion, which continues to gain traction. As in our domestic business, to enhance our business stability, we have strategically implemented multiple measures such as the transition to better quality borrowers, improving our product mix, offering attractive interest rates and expanding our partner base in the international markets. This approach is bearing fruit. The proportion of better quality borrowers increased to 54% in the first quarter of 2022 from 28% in the same period last year.

With the transition to better quality borrowers, we have also further strengthened our institutional funding base in the region, and we are confident of securing additional funding as our business grows.

With the COVID-19 situation largely under control in Southeast Asia, our transaction volume reached RMB 0.86 billion in our international markets during the first quarter of 2022, representing an increase of 13% year-over-year.

Of particular note, outstanding loan balance for our international markets totaled RMB 0.36 billion, representing an increase of 44% of year-over-year and 9% sequentially. We will continue to cultivate our partnerships with different players in the region and introduce new products and services to improve our offering mix. We are confident that these efforts will support our goal of becoming one of the leading players in the region.

Last but not least, I'd like to provide an update on our ESG performance, which is an important part of our growth and long-term value creation philosophy. This quarter's lockdown in Shanghai presented enormous challenges as well as opportunities for our team to develop effective ESG solutions. I'm incredibly proud to report that our entire organization stepped up to meet and overcome these challenges with creativity, determination and grace.

Our IT department quickly provided systems and software solutions to allow our employees to work from home to minimize work disruptions, and our procurement team and administrative team are working relentlessly to obtain supplies and provide ongoing assistance for our employees and partners who are immobilized by the lockdown.

On a community level, to assist local authorities, our IT department developed a notification system to provide timely pandemic-related updates for residents in certain areas. Our employees also procured food supplies for volunteers stationed in the Zhejiang district.

Finally, we reported last quarter that we received a low-risk ESG rating from Sustainalytics, a leading independent global provider in ESG research, ratings and data. Additional independent platforms such as Refinitiv and ESG Enterprise have also included us in their ratings, providing our stakeholders with even greater insight into our ESG goals and accomplishments.

We firmly believe that our long-term strategic plan, including financial, technological and ESG goals, will lead FinVolution to its next phase of growth and prosperity. As always, our efforts are inspired by our mission of leveraging innovative tech to make financial services better.

In summary, our excellent performance in the first quarter of 2022 underscores our strength and stability as well as our team's ability to overcome any challenges. Taken together, our high-quality customer base, outstanding credit risk management system and a strong overall execution form a firm foundation that will empower us to drive sustainable and quality growth in the long run and further strengthen our leadership position in the industry.

Going forward, we will remain dedicated to acquire better quality customers, both domestically and internationally, while leveraging our technological capabilities to further refine our credit risk assessment and management framework to optimize our product mix. With these advantages, we believe that we are well positioned to capitalize on the massive opportunities ahead and create great value for our customers, shareholders and all of our stakeholders.

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

Thank you, Feng, and hello, everyone. Welcome to our first quarter 2022 earnings call. In the interest of time, I will not go through all of the line -- financial line items on this call. Please refer to our earnings release for further details.

As Feng mentioned, we're encouraged that despite multiple challenges in the first quarter, we still achieved quarterly transaction volume goals for the eighth consecutive quarter while maintaining our risk metrics at a relatively stable level.

Our transaction to better quality borrowers coupled with strengthened relationships with funding partners and a consistent technological enhancement. The loan approval rate for our funding partners go to 76% in March compared to 62% in the same period last year. Our pipeline of potential partners remains strong, and we are confident to achieve real-world improvement in our funding costs in the near future.

Driven by our consistent efforts in research and development, we have continuously enhanced our share of technologies throughout our business operations, including customer acquisition and credit risk assessment, among other areas. These efforts have been validated by much more improvement across our operational metrics. Leveraging this strength, our net revenues for the fourth quarter rose to RMB 2.4 billion, an increase of 16% year-over-year.

Even more encouragingly, we also delivered a strong non-GAAP operating profit of RMB 602 million and maintained a substantial balance sheet with RMB 10.8 billion in total shareholders' equity.

During the first quarter, our average borrowing costs remained stable at around 24.3% compared with 26.7% in the same period last year. Of particular note, nearly all loans originated for our new borrowers are under 24%, reflecting our ongoing commitment to financial inclusion and our growing ability to align with regulatory directives.

We maintained our take rate for the quarter at a stable pace of 3.9%. Together with our [partners' course] and our consistent efforts in optimizing operating efficiency, we are confident that we can continue to deliver solid results going forward.

With the proportion of our capital-light model stabilizing at around 24%, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, remained stable at 4.1x. Our unrestricted cash and short-term liquidity position increased to RMB 6.3 billion compared with RMB 5.6 billion in the previous quarter, representing a [sequential] increase of 13% for the -- demonstrating the robustness of our balance sheet.

During the first quarter, we continued to target higher quality borrowers both in the domestic and international markets with attractive borrowing rates as part of our ongoing strategic transaction. Our customer acquisition trend also remained diversified across online and offline sources range from online information fees, international search engines and the mobile app store to customer referrals and our strong offline direct sales team, supporting a healthy and stable customer acquisition cost.

Apart from our annual dividend policy, we have also been returning value to our shareholders in the form of share repurchase. Between January 2022 and April 2022, we deployed about USD 15 million to buy back our shares in the public market. Since we initiated our share repurchase program in 2018, we have cumulatively deployed USD 147 million, representing 81% of our total share repurchase program.

Before I conclude my remarks, let me provide some additional color on our business outlook for 2022. Despite the recurring COVID-19 lockdown in the parts of China and a more challenging macro environment, we are still confident that our business operations will continue to gain momentum both domestically and internationally. As a result, we now expect our transaction volume in the second quarter to be in the range of RMB 40 billion to RMB 41 billion, representing an increase of around 20% to 23% year-over-year. Now based on our current assessment, I would like to reiterate our full year guidance for 2022 remain unchanged.

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

(Operator Instructions)

And our first question will come from Yada Li with CICC.

(foreign language) Okay, then I'll do the translation part. So the first one is on the funding side. So due to the limited supply, our funding costs actually increased in the fourth quarter last year. And are there any improvement this quarter? And what can we expect to see? And what is the trend of the funding cost in the future?

And the second one is about our international business. So could you please elaborate more on the progress of our product development and also on the optimization of our client base?

(foreign language) Jimmy.

[Interpreted] Yada, it's Jimmy. Let me do the translation for you. Our all-in funding cost in the first quarter was around 7.8%. And going forward, the industry will see a significant demand for better quality borrowers this year. And during the next few quarters, we are very confident that our funding costs will improve by between 30 to 50 bps.

And apart from the funding cost trend, we also see that our approval rate from our funding partners has been improved greatly, and this has actually greatly improved our operating efficiency. This metric actually improved from 60% to 76% on a year-on-year basis.

(foreign language)

[Interpreted] Yes. This is Jimmy again. Let me do the translation for you. For our international business, during the second half of 2021, we have been transiting to better quality borrowers, just like what we have been doing in China, and we have actually experienced better than expectation progress in the transition to better quality borrowers. You can actually see that on a year-over-year basis, our transaction volume grew by 13% from RMB 760 million to RMB 860 million. And of particular note, our outstanding loan balance grew by 44% from RMB 250 million to RMB 360 million.

And at the same time, the proportion of our better-quality customers also experienced improvement and grew from -- grew to 54% in the first quarter of '22 -- in the first quarter of 2022 from just 28% in the same period last year.

And lastly, you can also see that from the proportion of our installment loans, this proportion actually grew to 55% in the first quarter from the same period of 22% last year.

(foreign language)

(foreign language)

Our next question will come from Frank Zheng with Credit Suisse.

(foreign language) Let me quickly translate myself. I have two questions. The first is on credit quality. We see that 90-day plus delinquency continues to rise slightly in the first quarter. Can management give more color on early risk indicators in the second quarter to date? What kind of adjustments have company done for better risk management? And what's your outlook going forward for the second quarter as well as the second half of this year as we gradually recover from COVID?

My second question is a quick follow-up on the international markets. For international markets, what kind of growth in terms of volume and earnings contribution should we expect for this year?

(foreign language)

[Interpreted]. Frank, this is Jimmy. Let me do the translation for Alex. Okay. I know the market is very concerned about the impact of the pandemic, and we have also shared our -- some of the credit risk data earlier. For example, our vintage delinquency in the first quarter is around 2.4%, and this is about 5% fluctuation compared to the previous set of quarters. And on an existing loan balance, the credit performance is expected to increase by another -- by 5% to 10%.

And if you compare the situation today with the Wuhan lockdown back in 2020, the situation today is actually a lot better because the fluctuation back then was more than 10%. This is because of the transition to better quality borrowers strategy, which we have been adopting over the last few years. And if you take a look at it, the proportion of our better quality borrowers in China actually in the first quarter was around 70% compared to around 50% back then.

And let me now talk about our early day delinquency metrics. Our day 1 delinquency was about 5.3% in the first quarter versus 5.6% in the previous quarter. However, due to the impact of the pandemic, our day 1 delinquency increased to 5.5% in May, which is still within our estimation.

(foreign language)

[Interpreted] Frank, let me do the translation again. For our international business side, we didn't have aggressive growing volume growth target because our strategy this year is to transit to better quality borrowers. And based on the current data, the transition program is better than expectation. And we are very strong -- we have very strong confidence that our growth momentum for our international business will continue in the second half of the year and also this is able to diversify away from the risk that we face in China, like the lockdown in different cities in China.

Our next question will come from Alex Ye with UBS.

(foreign language) So I have two questions. First one is on pricing. So we have average loan pricing of 24.3% in Q1, which was spread from previous quarter. So as we are approaching the June deadline for the 24% cap, so what's the plan ahead on complying to that? And what's the outlook on average loan pricing? And what is the implication on your take rate? How do you expect your full year take rate to trend compared to Q1?

And my second question is on your loan application. So how does your overall loan application compare to the same period last year? Do you see a visible decline? So are you concerned that due to the on and off COVID resurgence, which could lead to the borrowers becoming more conservative in their borrowing behaviors? And how would that affect your future growth prospect?

(foreign language)

[Interpreted] Alex, this is Jimmy. Let me do the translation. Our take rate in the first quarter -- our pricing in the first quarter was 24.3%. And please bear in mind that in the fourth quarter of last year, our proportion of loans under IRR going forward was 80%. And during the first quarter of 2021, these proportions further increased to 84%. We believe we are ready in terms of customer preparation, financial preparations and regulations, compliance preparation. Going forward, we will maintain certain flexibility on pricing, and we believe that in the second half of the year, our pricing will still be around 24%.

Our take rate in the first quarter was around -- in the first quarter was 3.9%. As we have stated earlier, we expect funding costs will improve in the second half of the year, but our risk has also some fluctuations that will -- this will be offset, and our take rate will roughly be maintained at this level.

(foreign language)

(foreign language)

(foreign language)

[Interpreted] Alex, let me do the translation. There are some impacts on our [active loans]. It has some fluctuations, but this impact is less than 5%. And we also noticed that China has introduced positive policies and measures to boost consumer confidence. And thus, we are adopting a cautiously optimistic attitude going forward.

(foreign language)

(foreign language)

Thank you, Alex.

As there are no further questions, now I'd like to turn the call back over to the company for closing remarks.

Hello, everyone. Thank you once again for joining us today. If you have any further questions, please feel free to contact FinVolution investor teams. Thank you so much.

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

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