J and Friends Holdings Limited (JF) 2018 Q4 法說會逐字稿

Welcome to Pintec Technology Holdings' Fourth Quarter and Full Year 2018 Earnings Call.

(Operator Instructions)

Now, I will turn the call over to your speaker host today Ms. Joyce Tang, the Company's Investor Relations Director. Please go ahead.

Thank you for joining us today. Pintec has announced its quarterly financial results before the market opened and initial 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 the Company's 2018 performance, recent developments and strategies; followed by Company's CFO, Steven Sim, who will address 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 according to the safe harbor provision for the Private Security 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 as a cautionary statement, risk factors and details of the Company's filings with the SEC. The Company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, change in market conditions or otherwise except as required by the law.

Please also note that the Company will discuss non-GAAP measure today which are more seriously explained and reconciled to the most comparable measures reported under the general accepted accounting principles in the Company's earnings release and filing 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 measures and that non-GAAP measures are not uniformly defined by all companies including those in the same industry.

Now, I'm pleased to present Mr. William Wei, CEO of Pintec. William, please go ahead.

Welcome to Pintec's Fourth Quarter 2018 and Full Year Earnings Conference Call.

We concluded an eventful 2018 with decent operating and financial results in the fourth quarter. During this quarter, our total revenue was RMB226 million. We further increased our cash base profitability in the full year of 2018 as we generated an adjusted net income of RMB91 million compared to an adjusted net loss of RMB1.6 million in 2017.

The healthy growth and profitability that we have achieved were a result of our continuous efforts to solidify and expand our technical service which is also called SaaS Plus service model.

In addition to our industry-leading SaaS service platform, we are also offering a full suite of value-added solutions to our customers, including decision support, traffic enhancement, joint operations and advisory services. Our innovative SaaS Plus model has helped establish Pintec as an ideal partner of choice for financial institutions in China. As of December 31st, 2018, we had 93 financial partners, compared to 77 in 2017.

In December, we established a strategic partnership with China National Investment & Guaranty Corporation, one of the largest guarantee institutions in China in terms of business scale, product offerings and client resources.

In this partnership, we will provide this customer with a full suite of intelligent lending solutions, including value-added services such as decision support and access to a bigger variety of purchase scenarios. Through our joint operations, we will develop the next generation of digital lending technologies and nurture a healthy and prosperous credit financing ecosystem for small and micro-sized enterprises in China.

During the fourth quarter, we also started a cooperation with Fullerton Credit, which is wholly owned by Singapore's Fullerton Financial Holdings and focused on providing consumer loans to individuals, micro businesses and SMEs in China. We will develop full-fledged digital lending solutions for Fullerton Credit for various online consumer scenarios. In addition, we will also provide technical support to connect them with a broader reach of small and micro-sized enterprises and individual customers in China.

Through these partnerships with renowned financial institutions, we once again demonstrated our capabilities in developing fintech solutions as China's leading technology platform. 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 been successfully reducing our reliance on Jimubox. In terms of funding as a percentage of loan funded by Jimubox, the total outstanding loans facilitated through our platform decreased from 81 percent at the end of 2017 to 52 percent at the end of 2018. We expect that trend to persist throughout the whole year of 2019. Now for our business partnership expansion, we continue to leverage our industry-leading technology capabilities to attain many more new big partners by providing them with lending solutions.

By the end of 2018, we had a total of 129 business partners. For small and micro-sized enterprises services, we launched strategic partnerships respectively with Best Wonder, China UMS and SINA to develop digital lending solutions specifically designed to address and support the financial needs of China's SMEs driven by the success of our SME-friendly lending solutions. Our SME loan origination more than doubled in 2018 to RMB1.22 billion from RMB517 million in 2017.

We also forged more partnership in our existing verticals and entered new ones, including education services and children's product sectors with industry leaders such as Xiaomai Zjujiao and Beibei Group. Based on our SaaS Plus service platform, our jointly developed financing solutions will enable our partners to offer their customers more convenient and flexible installment payment options.

In January 2019, we partnered with Industrial Consumer Finance to jointly launch the next generation of mobile handset financing solutions for China Mobile subscribers. Industrial Consumer Finance is the consumer finance arm of Industrial Bank of China. Together, our installment loan solution will help add an efficient financing option to allow China Mobile's customers to purchase cell phones with maximum convenience and flexibility.

This is actually the second handset financing partnership we have established. Previously, we started to provide China Telecomm with our state-of-the-art financing solutions in 2017 in Q1. Working closely with the two largest mobile telecom operators in China will enable us to solidify our market leadership, accumulate more experience and improve our service quality in the mobile devices sector.

In summary, our service offerings have helped our business customers increase their sales, which in turn should help extend their Company's valuations. By the end of 2018, our installment loan solutions had helped our business customers fulfill 5.9 million orders of airline tickets, 7.4 million orders for train tickets, 7.3 million orders for hotel bookings, 1.2 million orders for mobile handsets and 80,000 orders educational seminars. As we further develop our service offerings, we should be able to provide more solutions in a bigger variety of business scenarios.

For our wealth management solutions, we maintained our market leadership, especially in the mobile devices solution space. Some of our notable client additions in the fourth quarter include Jiangxi Bank, Zhejiang Rural Credit Cooperatives and E-Capital Transfer.

Utilizing our Polaris engine and algorithm, as well as our big data and quantitative financial model, we are able to provide advanced robo-advisory systems to our clients. Our systems can analyze a series of user preference including investment history, risk tolerance and desired investment period to personalize their portfolios. In addition, our solutions will also execute real-time intelligent strategies of portfolios in response to market and customers' personal conditions and assets.

We continue to get new wealth management clients and provide them with unique value propositions using our advanced robo-advisory solution. As a result the total transaction volume of our wealth management business increased by 58 percent year over year to RMB3.3 billion in 2018 from RMB2.1 billion in 2017.

For our insurance business, we successfully launched cross-sale insurance products in the loan scenarios and jointly launched accident insurance products with Yi'An Insurance. It is expected that the insurance business will maintain a high growth rate in 2019.

In addition to expanding and improving our financial solutions in mainland China, we continue to actively look for new opportunities internationally. Recently, we have entered into an agreement to acquire an Australia-based SaaS Company, InfraRisk Pty Limited. InfraRisk provides systems to lenders to automate their credit origination risk management.

It currently operates in Europe and Southeast Asia while serving Toyota Finance Australia Limited, as well as a number of local banks in Australia. The acquisition is an integral part of Pintec's ongoing efforts to expand our business internationally. InfraRisk has partnerships with many international banks and also financial business that should be able to help us accelerate our global expansion.

In March, we have also entered into a share transfer agreement with a Company controlled by Jimu Holdings Limited to acquire the entire equity interest in Ganzhou Jimu small loan Company. The addition of small loan services to the Company's service scope will also allow Pintec to further enhance its data collection capabilities and provide its partners and customers with more robust financial solutions going forward.

Once the acquisition is completed, we will process multiple financial services licenses including wealth management, insurance brokerage, factoring and micro lending licenses. Such a comprehensive set of licensing enables us to carry out pilot financial services that will complement our existing service offerings.

Looking forward to 2019, we will remain committed to accelerating our operations in four key areas. Firstly, we will continue to focus on further expanding our product offering as well as improving the service quality of our SaaS Plus platform. With our full suite of competitive and modularized services, we are confident that our unique SaaS Plus service platform will continue to help us establish new partnerships with more financial institutions in the future.

Next, we aim to make our cutting-edge point-of-sale installment solutions available to more business partners, particularly in the education and the telecom industries. In addition, we are actively advancing our robo-advisory and the insurance product offerings.

Last, but not least, we will continue to invest in our international business. In January, we announced that Ms. Zhou Jing, President of our Company, will supervise and lead the development of our overseas businesses. Under her leadership, we have established an elite team to drive our international operations forward which is a key strategic focus for us in 2019.

Our international expansion efforts will build upon our foundation that we have laid over the past two years with PIVOT and Avatec in Southeast Asia. Our core SaaS Plus technology, as well as our intelligent digital lending and wealth management solutions, have a proven record of successful implementation on a large scale. We are confident that we can replicate such success formula beyond the Southeast Asia market to more countries and regions.

While we positively and prudently execute our global expansion strategy, we will also evaluate potential opportunities in M&A to further boost our capabilities in serving international clients.

So 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. Hello, everybody. Before I start, please note that unless otherwise noted, all numbers stated in my remarks are in RMB terms. All results are related to the fourth quarter of 2018 and all comparisons are made on a year-over-year basis.

In the fourth quarter of 2018, we generated RMB226 million of total revenues, including an 11 percent increase in revenues from technical service fees and a 307 percent increase in revenue from wealth management service fees and others. That growth was partially offset by a 26 percent decline in revenue from installment service fees thus resulting in a combined year-over-year revenue growth of 2 percent.

The slowdown in revenue doesn't reflect our efforts in creating better shareholder value as we transition from a mainly on book type point-of-sales installment loan service provider to a technology SaaS solution provider. In addition, as we establish new cooperation with additional financial partners during 2018, our revenue contribution from financial and institutional partners increased. Also, revenues in insurance management services increased significantly and thus offset the decline in revenues from wealth management services.

Cost of revenue decreased by 36 percent in the fourth quarter of 2018 to RMB90.5 million from RMB141.3 million in the same period of 2017 primarily due to the Company recording a reversal of provision for credit losses. In the fourth quarter of 2018, we grew our gross profit by 67 percent to RMB136 million and gross margin of 60 percent from RMB81 million and 37 percent respectively in the prior year period.

Such increases were mostly driven by three factors. Firstly, improved economies of scale. Secondly, greater revenue contributions from higher-margin personal and business installment loan solutions versus lesser contribution from lower margin POS installment loan solutions. And finally, the reversal of provision for credit loss during the fourth quarter of 2018.

Our total operating expenses increased to RMB219 million compared to RMB70 million mostly because of two factors, increased share-based compensation expense and increased advertising and promotional expenses.

General and administrative expenses increased to RMB153 million from RMB29 million primarily due to two factors, RMB77 million of IPO-related share-based compensation expenses and higher bad debt expense due to the growth of accounts receivable generated from uncollected technical services fee and the increase of account receivable with higher credit loss rates.

Research and development expense increased to about RMB36 million from RMB19 million, mostly because of the growth in our research and development headcount and related share-based compensation expense as we further enhanced our capability in big data and risk management technologies.

Operating loss as a result of increased operating expenses was RMB83 million in the fourth quarter of 2018 compared to an operating profit of RMB11.6 million in the same period of 2017.

Income tax benefits in the fourth quarter of 2018 was RMB54.2 million compared to income tax expense of RMB9.7 million in the same period of 2017. The year-over-year decrease was primarily due to the Company's assessment that the deferred tax assets are more likely than not to be utilized in the future as the Company cumulatively achieved pre-tax profit for 2017 and 2018 and expect to continue to achieve pre-tax profit for 2019. Therefore, the previously recognized valuation allowance was reversed as income tax benefit.

Our net loss in the fourth quarter of 2018 was RMB8.4 million compared to RMB9.3 million in the same period of 2017.

Our adjusted net income in the fourth quarter of 2018 was RMB91 million compared to an adjusted net loss of RMB1.6 million in the same period of 2017.

Basic and diluted loss per share were RMB0.08 or $0.01 U.S. in the fourth quarter of 2018 which represents the equivalent of RMB0.59 or $0.09 U.S. per American Depositary Shares, ADS. Each ADS represents seven ordinary shares.

Moving on to our balance sheet, as of December 31st, 2018, we had combined cash, cash equivalents and restricted cash of RMB710 million compared to RMB375.9 million as of December 31st, 2017. Also, our total net financing receivables, including short-term and long-term, declined to RMB753 million from RMB1,685 million and our total balance sheet of funding debts reduced to RMB701 million from RMB1,691 million at comparable points of time as we actively shifted our business focus towards providing technology services away from the on book installment loan services business.

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

(Operator Instructions)

Yan Li from Pintec.

Hi. Hello. This is --

Hi, Yan Li. I think slight correction there. Can you state which Company you're from?

Yes, William. (Inaudible). This is Yan. I'm from Citigroup. So I have three questions.

Oh, okay.

Okay. The first question is about your overseas M&A activity. We noticed you have been quite active in your overseas M&A and you have established joint ventures with companies focusing on different sales including acquisition of a Australian digital solutions provider. So can you talk more about what's your overseas strategy and what synergies you expect with your core business development and how will this M&A initiative eventually help in driving the revenue and the earnings growth?

Our second question is on the funding side. Can you update us on your progress in transformation toward the non-private risk-taking model? What's the share of loan based under this non-private risk-taking model and how much loan is from P2P business? Given the risk and easing liquidity environment, do you see any improvement in funding supply and do you see any relief on the funding cost?

Our last question is about the asset quality the macro slowdown recently. Are you seeing any pick-up in the liquidity risk? How do your Company balance between the loan growth and the risk controls? Thank you.

Hi. This is Jing from Pintec. I'm the President of the group. Yes. So referring to the first question in terms of international expansion, as you can see, we have continued to look for opportunities in the international market through different means, joint venture, M&A, as well as direct partnerships with overseas business partners. And so far we have completely two JVs in Singapore, as well as the acquisition of InfraRisk in Australia.

And these efforts will continue in other areas. When we expand, we understand that the different markets have different local environments in terms of culture, language, as well as regulatory environment and credit environment and therefore, while our expansion strategy is continuously to look for partners in those areas to make a joint effort.

But at the same time, with the development with our JV partners from Singapore covering Southeast Asia, we have seen that our products and solutions are actually replicable and scalable into the market. So that has been evident in the last year or so when we do expansion overseas. Yes.

Just to add to the first question that -- this is Steven -- in terms of contribution to revenue, we are not issuing any guidance on that, but maybe just to give some color. We would expect the business, once it's scaled to a reasonable size, we will then start to report separate numbers and also start to give guidance.

I think to Jing's point, because these are all technical services solution type business in the overseas market, it's not that much to subject to regulatory differences in various jurisdiction. That's also in line with how we want to change our business and at the same time, why we believe that it makes sense for us to scale internationally. And I'll pass over to William for the second question on funding.

So this is William. Thank you for the questions. So in 2018, we got some big achievements that diversify our funding sources and also downgrading the percentage from the funding of P2P platforms. So if you look at the numbers, so our on-book loan now is less than 15 percent already and currently, from the outstanding point of view, so the percentage has decreased from 81 percent to 52 percent considering about the loan funded by Jimubox. So this is last year's achievement.

So we took lots of effort, even downgrading this kind of percentage, through some of key strategies. The first one, we made our SaaS solutions well and putting more and more value-added services in our SaaS platform. So the total SaaS Plus model helps our potential financial partners to simplify their implementations when they have clients to engage in the consumer lending area.

So by doing this as our kind of value-added service, we can also help them to integrate our SaaS Plus system into their internal infrastructure. By doing this, we can help them to do more business with our help and we can help them to do the risk controlling modeling, big data, et cetera. With all of these efforts, they can accept in more situations that and our help gives them better risk controlling processes and lowers (inaudible) our risk-taking model a little bit.

So from many of the funding partners, we can see this trending (inaudible) we believe this kind of continuous investment in our SaaS Plus platform and more and more customers will accept this kind of model with very limited or zero risk taken by Pintec. So this is the product that will (inaudible) what we have done and what we are going to do.

Yes. And I'll answer the question regarding credit quality. In Q4 of 2018, we have seen improvement of credit quality from Q3. So 16 to 30 days, delinquency actually dropped from 1.37 to 1.27, 31 to 60 days dropped from 2.44 to 2.35 and 61 to 90 days from 2.41, 2.33. Now, these numbers have seen improvement even though our actual net outstanding or account receivable dropped from Q3 to Q4. So even though the denominator actually shrinked, but our delinquency rate actually dropped. That actually is a testament of improvement of credit quality.

A couple of things we did in Q4, one is that we continued to improve our credit models to be able to differentiate good asset versus bad asset at the acquisition stage. At the account management stage, we'll continue to strengthen the monitoring for our customers and take necessary action actually earlier if we see risk. So from those efforts and also in Q4, we did see the liquidity in the market improve from Q3 when there was a P2P crisis and there was a liquidity crunch in the market which actually made the credit quality worsen.

All three, some of our proactive actions, but also market recovery from Q3 have helped the credit quality of the portfolio improve and we will continue to improve our model, credit modeling to further improve our credit quality and make sure it's stable in the long run. Yes.

And to answer the question how do we balance growth versus risk, that is something that, as a solution provider of risk management systems, so it's also processes as something we continue to do on an ongoing basis. So in terms of risk management capability, using more data to improve our model performances and use new modeling techniques, all the things that we're doing in R&D and once we have seen success, then we will put it into production and that's something that we're continuously doing on an ongoing basis.

Yes. Next question, please.

(Operator Instructions)

Chengxi Zhao from Goldman Sachs.

Hi. This is Chengxi here. A few questions from me. First of all is regarding the origination in 4Q. So has the volume been seeing any growth? And the second one is about the funding collaboration. The management has mentioned there is a bank joint the funding provider. So can the management give more clarity and comment on this collaboration, such as whether there is an amount being given to Pintec and whether there are anymore in the pipeline?

And also can the management comment about the small loan Company acquisition? So when will this license be useful and how do the Company managing the potential conflict of interest for using this license? Thank you.

This is Steven. I'll take the first question. In terms of loan origination, year-on-year increase is obvious, but I think what may be less apparent is the quarter-on-quarter increase. All the numbers are there. So I won't repeat the numbers, but I think what you are asking is to get more clarity on the increase. As I mentioned in my remarks earlier, there's two factor increase both in terms of the personal loans and the SME and the slight decrease in terms of the POS loans which is the on-book portion of our business.

So again, this is a testament to how the business is moving towards more and more services, technologies, technical services rather than having more of an on-book business. That doesn't mean we are not improving or increasing the installment business in the future, but more that we are seeking a much better model in terms of having more of those business off book rather than on book.

In terms of the general health of the growth for Q4, I would say that especially compared to the last quarter where there is, indeed, a lot of volatility, specifically with the P2P market. We've seen a recovery and we've seen also normalizing levels, albeit these levels are not at the levels that we've seen at the beginning of the year, but it's definitely a big improvement over the lowest levels in Q3.

So let me pass on to William and he will take the question on the banking partners.

Yes. In this quarter, actually, I can take two of our key partners in the funding side as examples. The first one is already mentioned in my script which is CIGC. Chinese name is Zhongtoubao. Actually, they start the corporation with Pintec since the second quarter of last year and by end of last year, it already became one of the biggest, actually the biggest non-Jimubox funding partner with Pintec and according to their growing strategy, they're volume will be even increasing this year.

And the reason why we can achieve this result in such a short time is because they are using our SaaS platform. So our system deeply embedded into their system and this allow us to integrate our existing products systematically in a very efficient way and this is a very good example to show how our SaaS Plus model works.

And another interesting partner in the funding side is Fullerton. We used some time to integrate our system in the fourth quarter together with Fullerton for us to align the product strategy and also to integrate the system together. And now in the first quarter, their product has been launched already. So let's see their results in the future. And I think these two funding partners are our two biggest enterprises in the fourth quarter. Yes. Steven?

And there's also a question on --

Microlending.

--microlending. The question I think is can I clarify? I think there's a question on the conflict of interest. Can you clarify what's the question specifically related to that?

Yes. Because actually the business model now is helping, like enabling other financial institutions, but you if you are also using your book to lend, there could be some conflict of interest. If there is, can the management comment on that?

Specifically in the microlending area, actually most of our funding partners, they don't have a concern in this point mainly because very few of them would like to be the first player, especially for the new connected business partners or new financial products, lending products. They would like to see who is the first and was there historical data showing that the product imposed profitability and also the risk level are acceptable.

So that's why this kind of license for Pintec is extremely important. So in the future, we will actively use this license to the many innovative products and the first trial of the products and business partner connections work. So that's the major purpose of the reason why we acquire this license.

Understood. Thank you.

Yes. Thank you.

Thank you. Next question, please.

(Operator Instructions)

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

Thank you, everybody. Thanks for participating in our conference and see you next quarter.