J and Friends Holdings Limited (JF) 2018 Q3 法說會逐字稿

Welcome to Pintec Technology Holdings Third Quarter 2018 Earnings Call.

(Operator Instructions)

Now I will turn the call over to your speaker host today, Mr. Jack Wang from ICR, the Company's Investor Relations partner.

Thank you, all, for joining us on today's call. Pintec has announced its quarterly financial results today before the market-open. An earnings release is now available on the company's IR Web Site.

Today, you will hear from Pintec's CEO, Mr. William Wei, who will start off the call with a review of recent company developments and strategies. He will be followed by the company's CFO, Mr. Steven Sim, who will address the financial results in more detail. The president of Pintec, Ms. Jing Zhou, is also on the call and will be available during the Q&A session that follows the prepared remarks.

Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. The company does not assume any obligations to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise except as required by law.

Please also note that the company will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the Generally Accepted Accounting Principles in the company's earnings release and filings with the SEC. You are reminded that such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measure and that the non-GAAP measures are not uniformly defined by all companies, including those in the same industry.

Now, with that said, I am pleased to present Mr. William Wei, CEO of Pintec.

Welcome to Pintec's first earnings conference call as a U.S.-listed company.

So despite the market volatility, we successfully completed our IPO in late October. I would like to appreciate our existing and new shareholders for your vote of confidence in our business model and growth prospects. As we continue to execute our strategies and give you were shareholder value, we believe that more investors will recognize our value and join our shareholder base.

So recently there has been much discussion about the global economy slowing down, interest rates rising, consumer spending softening and the capital market experiencing stress. In addition to these economic uncertainties, there is also regulatory pressure on the fintech industry.

However, Pintec was able to overcome those macro challenges and deliver another quarter of solid growth. We grew our total revenue by 43% year-over-year to RMB247 million in the third quarter of -- third quarter of 2018 from RMB172 million in the same period last year, while we also improved our net income to a positive RMB3.4 million from a net loss of RMB19 million during the comparable period.

Now, please let me provide some highlights about our business operations. We offer five types of financial solutions with value-add tools and services to satisfy the needs of our business and financial partners, including point-of-sale financing solutions, personal installment loan solutions, business installment loan solutions, wealth management solutions and insurance solutions. We keep updating these solutions and improving our services system for institutional clients.

Pintec's to B services including a series of steps. First, we are utilizing our extensive experience in the development and operation of online financial products to provide advisory services for financial institutions, helping them acquire end users and optimize user experience more effectively. Following the successful implementation of our advisory services, we hope to convert these financial institutions to our financial partners and solution clients, especially in the digital lending area.

So in the past year, the government has introduced a series of new regulations targeting the online lending and the financing sectors. As a result, financial institutions with legitimate and proper licenses are now allocating more resources towards developing their own retail financing capabilities. So the demand for convenient, responsive, smart and inclusive financing solutions has created many opportunities for us. We will provide SaaS technology solutions for our financial partners.

After our SaaS platform is deployed to our financial partners, we will provide a series of value-added services including traffic enhancement, data mining, risk management and joint-operation services. We will also continue to work with them to ensure the optimal effectiveness of their system application, user acquisition and post-lending management. These services will provide us more opportunities for fees and revenues, deepen our relationship with financial partners and bring us stable revenues in long term.

For lending solutions business, the financial institutions' emphasis on retail finance has presented many market opportunities for technology service providers like us.

So during this quarter, we proactively marketed our smart financing solutions to our existing funding partners and potential institutional partners. We established strategic partnerships with a large domestic financial group and a large international financial group to provide them with our technology solutions and our system implementation services. In addition, we are actively engaging other licensed financial institutions, including commercial banks and trusts, for potential collaborations.

We leveraged our online and offline traffic channels and our innovative technologies in data tagging, user segmentation, and systematic pre-screening to provide our clients with traffic aggregation and precision marketing services. Our value proposition in user acquisition and retention as well as marketing efficiency enhancement continued to attract new partners, including Pingan Bank Credit Card and Bank of Communications Credit Card, to our platform in the third quarter.

In addition, we are providing smart risk management services to our financial partners such as Yunnan Trust and Industrial Consumer Finance. By integrating our smart screening technology into our financial partners' risk management systems, we have helped them improve their screening efficiency and effectiveness.

Meanwhile, we also provide -- we also applied our competitive edge in big data and AI to provide a suite of data mining tools and services, including risk assessment scoring, integrated modeling and other related products. We have received an interest to cooperate from multiple financial institutions which we expect to contribute to our revenue growth in the future. Currently, we are in the planning phase of a joint data lab with the Export Trust Company. Going forward, we will seek close collaboration in data mining with licensed financial institutions.

As we collaborate closely with our partners, our partnerships enable us to cultivate new growth drivers and diversify our funding sources. As a result, we have successfully reduced our reliance on Jimu Box in terms of funding, as the percentage of loans funded by Jimu Box over the total outstanding loans facilitated through our platform reduced from 99% at the end of 2016 to 81% at the end of 2017 and further to 66% at the end of September of 2018.

We continued to expand our point-of-sale installment solutions for our business partners. In the third quarter, we leveraged our industry-leading technology capabilities and attained a number of new clients. We entered a number of new sectors, including home decor, medical devices, as well as cosmetics and beauty industries. Some of our notable client additions including KuaiBei, Permobil and Evercare.

We further optimized our screening engine and accelerated our product processes to better address the current market uncertainties. Specifically, we continually refined our big data system by testing and filtering out low-quality data sources. In addition, we are in the process of developing a social network analysis tool to enhance our risk management capabilities.

For wealth management solutions, we maintained our market position and advantage for our robo-advisory solutions. We successfully added Bank of Nanjing and Guoyuan Securities to our client list in the third quarter.

In addition to our previous solutions, we commenced to provide value-added services such as consulting in the field of online operations to leading financial institutions, including Invesco Great Wall, CCB Principal Asset Management, China International fund, Bank of Communications Schroder Fund Management, ICBC-Credit Suisse fund and many others. During this quarter, we added two new institutions, including Essence Fund and Bank of China Investment Management to our long roster of financial institutions clients.

At the same time, our insurance solutions also achieved meaningful progress during this quarter as we established partnerships with reputable institutions such as [Bank of Kubong].

We have obtained licenses for fund distribution, insurance brokerage and commercial factoring. We are actively working with the relevant authorities to obtain a micro-lending license as well. These licenses ensure the full regulatory compliance of our entire suite of solutions. In addition, they enable us to offer financial services while being fully compliant with regulatory requirements so that we can further enhance our expertise and accumulate data to perfect our technology solutions.

In addition to offer our financial solutions in China mainland, we are seeking opportunities outside China. We have launched our Singapore-based joint venture, PIVOT, with FWD Group, and established Avatec with United Overseas Bank Limited. Avatec has begun to provide smart risk management solutions and data products to banks, tech companies and fintech companies in Indonesia and Vietnam. PIVOT is also in communication for robo-advisory solutions with clients in Singapore, Malaysia and Hong Kong.

In the future, Pintec will continue to invest in the following three areas. First, we will expand our partner base and reduce our reliance on specific partners. We also expect to build some -- build more strategic cooperation relationships with existing institutional clients.

For software sales and advisory services, we will set up a dedicated advisory team to expand our business and a deeper impact on institutional clients.

For value-added services, we will enhance the competitiveness of our data and traffic products by further expanding their capabilities. Following discussions with certain institutions, we are also considering applying for another financial license. We might consider locking in our technical services by means of investing in a licensed financial company.

In addition to five solutions and value-added services and tools, we are also actively exploring opportunities to replicate our success in China to overseas markets including Europe and Africa. As we evaluate both developed and emerging markets, we believe the experience and expertise accumulated in the China market is readily transferable to overseas markets. Going forward, we will continue to explore more geographic expansion opportunities in a prudent and a calculated manner.

Thirdly, we will improve the flexibility of our products and the modularity of our technology. We will also enhance our ability to conduct retail finance business and continue to meet regulatory requirements. Additionally, we will constantly invest in our big data capabilities to explore new business directions and maintain the competitiveness of our products and services.

So in summary, we have put strategies in place to diversify our revenue sources, reduce our market risks and sustain our profitable growth. Going forward, we will focus on further expanding our international business as well as enhancing our domestic service offerings across all of our business lines and sharpening our competitive edge in our SaaS solutions and value-added services. We are confident that we have the management team, technology and strategy in place to thrive under any market conditions.

With that, I will turn the call over to our CFO, Mr. Steven Sim, to go through our financial results in more detail.

Thank you, William, and hello, everyone on the call. Before I start, please note that all numbers stated in my following remarks are in RMB terms, unless otherwise noted.

In the third quarter of 2018, our total revenues grew by 43.4% year-over-year to RMB246.8 million from RMB172.1 million in the same period last year.

Specifically, revenues from our technical service fees, which accounted for 70.2% of our total revenues, grew by 31.7% to RMB173.3 million in the third quarter of 2018 from RMB131.6 million in the same period of 2017. The year-over-year growth was mainly attributable to the significant increase in monthly service fees which resulted from growth in the outstanding balance of loans, in particular, personal installment loans.

Revenues from our installment service fees, which accounted for 28.7% of our total revenues, increased by 81.0% to RMB71.4 million in the third quarter of 2018 from RMB39.4 million in the same period last year. The growth was driven by an increase in the on-book installment loans with their improved fee arrangements, as well as a trend moving towards developing the installment loans with higher margins and longer terms.

Revenue from our wealth management service fees, increased to RMB2 million in the third quarter of 2018 from RMB1 million in the same period last year. The increase was primarily attributable to the development and expansion of wealth management services.

Our cost of revenue increased by 5.1% in the third quarter of 2018 to RMB120.9 million from RMB115.1 million in the same period last year. As a percentage of total revenue, our cost of revenue decreased to 49% in the same -- in the third quarter from 66.9% in the same period last year. The reduction was mostly due to a 32.8% decrease in our provision for credit losses to RMB28.1 million in the third quarter of 2018 from RMB41.7 million in the same period last year as we reduced our on-balance-sheet loan balances.

Our gross profit increased by 120.8% to RMB125.8 million from RMB57 million, and our gross margin expanded to 51% as compared 33.1% during comparable periods. The increase in gross profit and gross margin was mainly due -- were mainly due to better economies of scales that we achieved across our business lines and a bigger proportion of higher-margin products such as -- such as personal installment loans than the lower-margin products such as point-of-sale installment loans.

Our total operating expenses in the third quarter of 2018 increased to RMB101.8 million or 40.9% of total revenues as compared to RMB66.8 million or 38.8% of total revenue in the same period last year.

Sales and marketing expenses decreased by 5% to RMB18.4 million in the third quarter of 2018. The decrease was primarily attributable to the Company's optimized marketing process and improved marketing efficiency.

General and administrative expenses increased to RMB63 million in the third quarter of 2018 from RMB28.3 million in the same period last year. The increases was mainly attributable to the increase in bad debt expense related to the increasing accounts receivable coming from uncollected technical services fee and the increase of accounts receivable with higher credit losses rates.

Research and development expenses increased by 6.4% to RMB20.4 million in the third quarter of 2018 as we continued to invest in our talent recruitment and enhance our R&D capabilities.

Our operating profit, thanks to our strong top-line growth, improved to RMB24.0 million from an operating loss of RMB9.8 million in the same period last year.

Our net income in the third quarter of 2018 was RMB3.4 million, compared to a net loss of RMB19.1 million in the same period last year. Excluding share-based compensation of RMB11.7 million, our adjusted net income was RMB15.1 million in the third quarter. This compares to a non-GAAP net loss of RMB11.3 million in the same period last year.

Net loss attributable to ordinary shareholders in the third quarter of 2018 was RMB30.8 million compared to RMB30.3 million in the same period of 2017. Adjusted net loss attributable to ordinary shareholders in the third quarter of 2018 was RMB19.1 million.

Diluted GAAP and non-GAAP net loss per ordinary share was RMB0.45 and -- sorry, 0.45 and 0.28, respectively, in the third quarter of 2018.

We have been vigilant towards the softening macro economy and the changing industry dynamics. During the third quarter of 2018, we purposefully reduced our risk-taking financial services business. As a result, our quarterly financial results, including our total revenues, gross profit and operating profit declined sequentially from the second quarter of 2018.

We believe such sequential decline is temporary and healthy during this transitional phase. As we increase our revenue contribution from non-risk-taking technology sales and consulting services, we are confident that we will eventually resume our sequential revenue growth.

Turning to our balance sheet. As of September 30th, 2018, we had combined cash and cash equivalents, restricted cash and short-term investments of RMB408.5 million. This compared to RMB375.9 million as of December 31st, 2017.

Total net financing receivables, including short-term and long-term, declined to RMB965.0 million at the end of the third quarter from RMB1.68 billion at the end of last year, mostly due to our strategy of providing more and more technology sales and consulting services than on-book installment loan services.

Going into the fourth quarter of 2018 and also into 2019, we will continue to invest in our core technology competence, minimize our exposure to market risks and maximize our value of our business and -- to our business and financial partners. At the same time, due to the myriad of uncertainties in the macroeconomic environment, we have decided not to give any quantitative guidance at this point. We will stay attuned to the changing market dynamics and update our outlook accordingly.

This concludes management's prepared remarks for today. Operator, we are now ready to take questions.

(Operator Instructions)

[Cheng Xiao] from Goldman Sachs.

My question is about your on-balance sheet loans and are we still originating any new loans through this on-balance sheet channel and are we expecting it to reduce to zero in a period of time? Thank you.

This is Steven. So the trend, as you can see from past results, is that there will be a continuous decline in financing receivables balance and this is attributable to temporary and long-term strategic factors.

Temporary factors, as we mentioned previously in our prospectus and also in the script today, that we see that the p2p being the main funding source of our point-of-sales installment loans before second quarter of 2018 is shrinking, but we believe that that is temporary and will reflect the recovery as the market improves.

Secondly, per management strategy in the long run, we still strongly focus on the providing technical solutions rather than taking more and more on-book loans. Whether as to it will go down to a certain percentage, I think we do not have such targets, but at the same time, we obviously expect the overall balance to decrease over time and that's part of what we believe Pintec's core value is in terms of providing technology services rather than taking on credit risk.

Edward Du from Deutsche Bank.

I have three small questions. My first one question is about can you share more color about your new business partners and for your existing partner's revenue contribution from your top five business partner like the Ctrip, Qunar, [Telco] and the VIP shop?

And my second question is about your funding condition and can you -- can you just share that? What's your proportion from the p2p and compared to other financial institutions and then what's the funding cost of each category?

And my third question is can you share more color and the outlook for your asset quality in Q4 and next year? Thank you.

Thank you, Edward. So let me take your question in parts. As of the end of Q3, we have 186 business partners and 86 financial partners. This is a net result of some incoming and outgoing financial and -- sorry -- incoming and outgoing business and financial partners. And as William mentioned earlier in his remarks, we have quite a few new business partners during this quarter. This includes KuaiBei, Permobil, Evercare for point-of-sale solutions. Bank of Nanjing and Guoyuan Securities actually came in for the wealth management solutions. And the Zhongbang Bank came in for the insurance solutions.

So again, we believe that this is a proof that despite a pretty volatile market, our solutions is still well reflected and well regarded in the market and we believe that having this new very well regarded partners is proof that our business is going in the right direction.

The next part of your question, 40 -- so in terms of the total revenue contribution for the cooperation with our top five business partners, approximately for the first nine months, they approximate about 40%. And again, although the bigger partners are still from the OTA like Ctrip and Qunar, we do have a lot of diversification and as we go forward, their contribution is actually lower on a total basis.

On the next part of the question, the p2p funding as of the end of Q3, per the outstanding balance, is at 66%. Again, we remarked on this earlier. This compared to 81% at the end of 2016 and 74% at the end of 2017. Again, this is showing the positive trends towards diversification. Although we still believe that, in the long run, the p2p funding source is an important one, but we actively work to getting more and more financial partners over the long-term.

Typical funding costs for the p2p and other financial institutions remain in the low double digit range. As we scale towards more and more partners, obviously we will have higher competitiveness and more optimized cost of funding. We believe that we can see a positive trend on this end next year.

On the asset quality, I think we did disclose this and we talked about we have M1 of 4.8% at the end of Q3 compared to M1 of 3.5% at the end of Q2. And I can pass over to Jing, our President, to maybe give more qualitative color to the trend in terms of asset quality.

Yes. Thanks, Steven. So basically, as we have disclosed during the statement, our M1 at the end of Q3, 4.8% higher compared to M1 of 3.5% at the end of Q2. And the reason is because [of loans] balanced down in Q3 and that is due to the companies practically managing our financial business. As Steven had mentioned earlier, we continue to manage risk more stringently, as well as improve our risk management framework and select better customers. And therefore, the outstanding balance has dropped and therefore, there's a denominator effect on this ratio.

In terms of [vintage] losses, Q3 is similar to Q2 and we expect this trend to be stable going forward in Q4 and also into next year.

(Operator Instructions)

[Joshua Shu] from ICBC International.

First of all, congratulations on the company's very strong performance during the third quarter. I understand that the company faces uncertain regulatory environments while developing new business lines with a -- involving business focus and my first question is how do you see the regulatory environment evolving over the next six months to one year? And my second question is what is Pintec's plan for the wealth management and insurance services business lines? Thank you.

Okay. This is William. So firstly, so Pintec's -- most of the business lines for Pintec, we are not the direct entity to be regulated, but because of many of our direct customers are financial institutions so they are heavily impacted on the -- any change from the regulation policy. So we can see that in this -- in this couple of quarters, I would say regulations are getting more and more predictable and stable.

What we can show in this -- in the last -- in last quarter is we saw some of the progress in the regulation to traditional financial institutions to regulate how to participate in the online lending with the help of technical companies. So [the] public regulations that ask for comment, it's not the final official one. We see some positive trend that [he] gave a very clear position on this kind of business below any of the -- even the original bank to participate some of the online lending business with the help of enablement or technical companies.

This is a clear trend. With several years of understanding on the market, the regulators are getting more and more confident. So this is what we can see in the last quarter. And going forward for the next six months to one year, I think the biggest challenge for the whole industry is how to -- is how to make sure the p2p registration [are going] well. So from the information we get from the market that so far the progress is pretty okay and most of the platforms, they finished their self-check in last month and next step is to be checked by local government and control regulators.

So [let's see now], but anyway, I think from the regulator's activities, I can see [these things] are getting more and more stable. This is a -- to answer your question on regulation issues.

So yes, for our plan and what our plan for the wealth management and the insurance services, I think currently our strategy is very clear. So we use our robo-advisory engine as our, I would say, [key] applications to commence the financial institutions, including the banks and security companies. And next step, we try to extend this scope first to insurance products to help them to sell more insurance products to their end users.

Second step is to deeply embed it into their own asset products to make sure our robo-advisory engine can involve their own assets, not only the standard one. Third is trying to build out the connection with our digital lending solutions also just to try to make sure that our potential financial partners can accept all of our business lines. Our strategy is clear. Yes. Thank you.

Daphne Poon from Citi.

Hi. Thank you for taking my question. So I've got two questions. So the first one is on the funding side. Just so we understand [elect] in 3Q the institutional funding partners. Some of them were turning more cautious because of the -- of what's happening on the p2p side. So I just want to get an update on the -- of the latest trend of this institutional funding partnership, like whether there has been any improvement lately.

And the second one is a follow-up on the asset quality side. So as you mentioned earlier that regarding the more -- in light of the more challenging macro outlooks that you're turning more cautious in terms of your loan approval. So can you give us more color in terms of is there any specific adjustment that you have made in your risk model? Any particular parameters that you focus more about? And also what would be the current loan approval rate versus previously? Thank you.

Okay. This is William. So what we can see is in the third quarter just because of our progress in the institutional partnership with financial institutions, they allow us to keep good progress in the -- in the new business. So what we can see is the financial institutions rather than previously peer-to-peer lending platform that contribute the majority part in the funding side. So this is the progress we can see.

So our strategy is very clear, try to build up the partnership with the [15] funding partners. So we have -- in the last quarter, we've successfully signed two strategic partnerships with two of biggest our financial partners. One is an international one, Fullerton, and another one is the local one called the Zhongtoubao.

So both already in our cooperation for quite a long time and Zhongtoubao start the cooperation since the beginning of this year and now they already became our biggest financial institution partner already and they are also show -- they also show a strong willingness to give us an even more close and strategic partnership with us to welcome our enablement services in all of their lending related business lines. So this is the biggest achievement.

And also for Fullerton we had made a very good strategic partnership agreement with them in the third quarter and because of the system integration, it take time. So we didn't see much number in this quarter, but in the next quarters we can see their contribution in both the [wall and the] quality of the business.

So we are looking forward, I think, such similar cases will come more and getting more and more normal that the traditional financial institutions they can accept enablement business model from Pintec.

Okay. And regarding the question about the credit quality versus approval rate, the answer is yes. In Q3, we proactively lower approval rate to make sure that we are more prudent in terms of risk management because even though we are not taking on a lot of these assets on our own balance sheet, we want to make sure that risk management and asset quality is still the top priority for what we do and therefore, we actually proactively tightened credit criterias in Q3.

At the same time, we actually continued to improve our risk models using new methodologies as well as data sources to increase the differentiation of our model performances and by Q4, we were seeing a recovering trend while the risk has remained stable and we expect this trend to continue going forward as well.

There are no further questions at this moment and I will hand back to the management for their closing remarks.

Okay. Thank you very much for joining us today. We appreciate your support and we look forward to updating you on our next quarter's conference call in a few months' time. In the meantime, please feel free to get in touch with us if you have further questions or comments. Thank you.

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