J and Friends Holdings Limited (JF) 2019 Q3 法說會逐字稿

Good morning, and good evening, everyone. Thank you for standing by, and welcome to Pintec Technology Holdings First 9 Months 2019 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.

Joyce Tang;Investor Relations Director^ Thank you, operator. Hello, everyone, and welcome to the First 9 Months 2019 Earnings Conference Call of PINTEC. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.pintec.com.

A replay of the call will be available on the IR website in a few hours. Participants on today's call will be Mr. Allen Dong, Chairman and Acting CEO of PINTEC; and Mr. Steven Sim, CFO of PINTEC. Management will begin with the prepared remarks, and the call will conclude with a Q&A session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views addressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed 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 the applicable law. Please also note that PINTEC's earnings press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. PINTEC's press release contain a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our Chairman, Mr. Allen Dong. Allen, please go ahead.

Thank you, Joyce. Hello, everyone. Thanks for joining this call today.

Before I discuss our business developments in the first 9 months of 2019 and our growth strategies going forward, I would like to highlight some of our key financial and operating results during the period.

For the first 9 months of 2019, our total loan facilitated was RMB 9.5 billion compared with RMB 11.6 billion in the same period of 2018. As we continue to face challenges in the microenvironment and industry conditions, with minor decrease of total revenues to RMB 776 million from RMB 837 million in the same period of 2018. Gross profit increased by 26% to RMB 474 million from RMB 375 million in the same period of 2018, while gross margin expanded to 61% from 45% in the same period of 2018. Furthermore, adjusted net income increased by 225% to RMB 148 million from RMB 46 million in the same period of 2018.

In the environment of macro market volatilities and the regulatory headwinds, we continue to focus on leading solution business -- lending solution business with healthy, modest developments of international business. The strategy is to deepen core capabilities of technology and operation through lending solution and build brand by serving handful of important customers in the international market.

During the third quarter of 2019, we proactively optimized the following 3 areas around our focus of lending solution business. Structure of funding source is the first area that we are focusing on optimizing; second, product mix; and the third, our cost structures. The successful improvement of these core areas has bolstered our resilience to uncertain macro conditions, fill the competitive advantages of our services and have boosted our operating leverage in return.

First, to continue improving structure of our funding sources during the quarter, we focused on strengthening services to license the financial institutions along with bolstering our digital lending solutions business and its revenue generation capabilities. Such efforts have further diversified our funding sources and reduced our reliance on specific institutions.

During the third quarter of 2019, for example, the total volume of loans we facilitated was RMB 2.47 billion. Meanwhile, 93% of the total loan volume in the quarter was funded by non-P2P financial partners compared to 76% in the prior year period. Additionally, our total outstanding loans was RMB 4.55 billion in the quarter, 67% of which was funded by non-P2P financial institutions compared to just 34% in the prior year period.

This achievement is a result of our ongoing efforts to strengthen relationships with our financial partners by leveraging our state-of-art technology and leading service capabilities. Consequently, partners that we have worked with closely for an extended period of time, including Guotou Internet micro-lending license; Fullerton Credit, industrial consumer finance company; and Yunnan international trust company have consistently increased their funding supply to us. In fact, these partners have funded 60% of the total volume of loans facilitated in 2019 to today, which further illustrated our capability to build trust and develop more closely relationships with our financial partners over time. As our services continue winning confidence from clients and the market, the better payment structure is being accepted. Under the new payment structure, some clients will cover the initial R&D expenses for deployment of our technology solutions, and we will continue to charge fees based on their performance thereafter. This adjustment not only enhance the health of our cash flow but also better facilitate the sustainable expansion of our technology solutions business.

Second, for fulfill our goal of serving prime and near-prime market segments, maintaining stable credit performance and building premier brand, we continue to optimize our product mix with focus of high-quality personal loans through business partners with point of sales during the quarter. This was accomplished through all of our existing business partnerships across industry segments. As a result of these efforts, the volume of personal loans generated from point of sales installments accounted for 82% of our total personal loan volume and 58% of our total loan volume during the third quarter of 2019.

Point of sales installment loan users, especially those acquired from our cooperation with online travel agencies and the telecom operators have higher consumption power and are more likely to make their repayment on time. Recognizing this trend, we continued to expand our cooperation with online travel companies such as Ctrip, Qunar. During the quarter, as a result, our point of sales installment loan services were made accessible to all registered users on both Ctrip's and Qunar's platforms, contrasting our previous system in which such services were only available to those users in need of point of sales installment loan services.

On the telecom carrier front, we continue to fortify our partnerships with all 3 dominant mobile telecom operators in China: China Mobile, China Telecom and China Unicom. China Telecom, for example, has more than 300 million users nationwide and has been utilizing our handset financing solutions since 2017. Within 2 years of this partnership, we have served 1.6 million of China Telecom's users to facilitate more than RMB 1.6 billion in loan accumulatively. Our services now cover about 70,000 China Telecom branches nationwide and have meaningfully improved the performance of China Telecom's handset cells. Nevertheless, the overall penetration of our services is still ramping up and has substantial headroom for future growth.

Third, we were focused on the optimization of our cost structure. As such, we flattened our organizational ranks, streamlined our operational procedures and tightened our cost control measures during the period. For example, by disbanding our strategy and the science department as well as our operating and design centers, we're able to scale down our number of organizational layers, reduce our labor costs and deploy this personnel back into these business segments, which have more direct impact on the development of our business and revenue. Moreover, we also adopted a more stringent review process for our investments and implemented clear KPIs for our wealth management and e-commerce department. Going forward, such optimization will further support by ability to whether potential market uncertainties and the macro headwinds.

Beyond the improvements of our domestic business, we have also continued to expand our geographic footprint. Following the establishments of our business alliance earlier in 2019 with East West Bank, one of the largest independent bank headquartered in Southern California. We successfully leveraged our leading financial technology capabilities and a deep industry experience to provide the bank with digital banking services and a support to its digital transformation. In response to the bank's positive feedback, we're planning to help with its branding efforts in China to facilitate additional collaborations between the bank and other potential domestic partners.

In addition to our ongoing success with East West Bank, InfraRisk, our wholly owned subsidiary based in Australia recently announced the expansion of its partnership with Toyota Financial Services, a subsidiary of Toyota Motor Corporation, the world's largest carmaker. Under the new partnership, InfraRisk will leverage its capabilities in big data analytics, cloud computing and AI technologies to provide a highly efficient credit management solutions to Toyota Financial Services, in both Germany and Austria. These solutions will enable Toyota Financial Services to better execute its credit process, facilitate lending to dealerships and managing larger fleet of the customers.

In regards to the recent management changes, due to personnel health or family considerations, all parties remain on good terms. In addition, these personnels are still actively serving as consultants to the company. On behalf of PINTEC and the Board, I would like to thank those individuals who left for their dedication and their continuous contribution to the company.

Currently, each of our business units is being spearheaded by a member of our experienced executive team. Our core operations team remains stable and our partnerships have not been affected. In summary, our focus on optimization of our business in the third quarter has helped to refine efficiencies of our operations while only in our competitive advantages. Our unique suite of financial services with leading risk management capability, technology -- technical services to improve operating efficiencies and Internet-based end-user services continue to drive our core value proposition. Importantly, our digital lending solutions now cover an extremely comprehensive range of customers, demographics and they consistently generate a healthy flow of the traffics both of which our financial partners find extremely attractive.

Looking forward, we're confident in the potency of our organizational frameworks, depths of our talent pool, uniqueness of our solutions and long-term availability of our business strategies. Despite the current challenges in the macro environment, we believe in the strength of our core business, risk management culture and our equity valuation will eventually come to reflect the fundamentals over time.

Thank you very much. With this, I would like to turn the call over to Steven, our CFO, to discuss our financial results.

Thank you, Allen. Hello, everyone. Please note that unless otherwise noted, all numbers stated in the following remarks are in RMB terms and were rounded to the nearest million.

Before I start reviewing our financial results, I would like to announce that today, our Board of Directors has approved a share repurchase program. This program will allow us to buy back up to USD 10 million worth of our ADSs in aggregate value. The Board's decision expresses confidence in our long-term growth prospects and reflects our shared belief that buying back shares is a good investment opportunity for the company.

Now let's move on to our financial results. In the first 9 months of 2019, our total revenues decreased by 7% to RMB 776 million. Revenues from technical service fees increased by 10% to RMB 643 million in the first 9 months of 2019 from RMB 586 million in the same period of 2018, primarily as a result of guarantee provided under the new business arrangement between the company and the Jimu Group. Revenues from our installment service fees, which accounted for about 15% of our total revenues, decreased to RMB 114 million in the first 9 months of 2019 from RMB 241 million in the same period last year. The decrease was as a result of reductions to our on-book installment loan volumes and in line with -- which is -- with the company's strategy of improving portfolio structure.

Revenues from our wealth management services fees increased by 87% to RMB 19 million in the first 9 months of 2019 from RMB 10 million in the same period last year. The increase was primarily attributable to the development and expansion of our wealth management services and, in particular, our insurance solutions. Cost of revenue decreased by 35% to RMB 303 million in the first 9 months of 2019 from RMB 463 million in the same period last year. As a percentage of total revenues, our cost of revenues decreased to 39% in the first 9 months of 2019 from 55% in the same period last year. The reduction was mostly due to a lower volume of our on-book loan business in the first 9 months of 2019, which led to lower funding costs and provision for credit losses in the same period.

In addition, we also expanded our business partnerships while strengthening our brand influence, which enabled us to further reduce our customer acquisition costs. Consequently, customer acquisition costs related to origination and servicing costs decreased by 19% year-over-year to RMB 122 million in the first 9 months of 2019. Gross profit increased to RMB 474 million in the first 9 months of 2019 from RMB 375 million in the same period last year. By refining our cost structures, we successfully expanded our gross margin to 61% in the first 9 months of 2019 compared with 45% in the same period last year. Total operating expenses increased to RMB 343 million in the first 9 months of 2019 from RMB 289 million in the same period last year.

Let's now review the breakdown of operating expenses for the first 9 months of 2019. Sales and marketing expenses decreased by 14% to RMB 60 million in the first 9 months of 2019 compared with RMB 70 million in the same period last year. The decrease was as a result of our ongoing efforts to optimize our product matrix and the winding down of our off-line personal installment loan business, the latter of which has been occurring since the end of 2018. As Allen mentioned earlier, we have also improved our marketing efficiency by dissolving our offline direct marketing divisions, which significantly reduced our offline marketing and promotional expenses in the first 9 months of 2019.

Research and development expenses increased slightly to RMB 61 million in the first 9 months of 2019 compared with RMB 60 million in the same period last year as we continue to invest in the recruitment of talents and enhance our R&D capabilities. General and administrative expenses increased to RMB 222 million in the first 9 months of 2019 from RMB 160 million in the same period last year. The increase was mostly due to a higher bad debt provision related to the service fees, depreciation and amortization of intangible assets, and professional service fees associated with being a public company.

Operating profit was RMB 131 million in the first 9 months of 2019 compared with RMB 86 million in the same period last year. Net income increased by 630% to RMB 115 million in the first 9 months of 2019 from RMB 16 million in the same period last year. The increase was driven in aggregate by deferred income tax benefits of RMB 56 million recognized in 2019 but not previously available in 2018. In addition, we also recorded RMB 36 million in accumulated interest income from a loan made to Jimu.

Adjusted net income increased by 225% to RMB 148 million in the first 9 months of 2019 compared with RMB 46 million in the same period last year. Diluted GAAP and non-GAAP net income for ordinary shares were RMB 0.38 and RMB 0.49, respectively in the first 9 months of 2019.

Now let's turn to our balance sheet. As of September 30, 2019, we had a combined cash and cash equivalents, including restricted cash of RMB 608 million compared to RMB 710 million as of December 31, 2018. Total net financing receivable, including short-term and long-term receivables, declined to RMB 262 million at the end of September 2019 compared with RMB 772 million as of December 31, 2018. The decline was mostly due to the winding down of our on-book installment loan services and shift to an asset-like -- shifted to an asset-like model.

Looking ahead, we will continue to invest in the improvement of our product offering and technological capabilities, although we face regulatory and macro uncertainties as well as industry-wide challenges, we remain confident in the long-term sustainability of our growth prospects.

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

(Operator Instructions) Your first question comes from the line of Sherry Zhang from Citi.

I have two questions and the first is regarding your transition to institutional funding because just now management mentioned that your P2P funding has decreased, and your cooperation with non-P2P financial institution has been very stable. So does it mean that you are going to expand your non-P2P funding partners? And if so, what types of financial institutions are you looking at? And how will this impact the company's take rate?

And the second question is about asset quality because we do see the delinquency rate for short-term loans are rising, so what measures is company taking to shield yourself from the rising loan before risk? And how should we forecast the delinquency rate trends? So these are the two questions.

Sherry, this is Allen. Thanks for paying attention to our funding source diversifications. As you might be aware of in China, the continuous regulatory restriction really limits how much P2P funding can be allowed in the whole industry. And very obvious progress of the company is most of our lending solutions are funded by nonpeer-to-peer platforms, mostly by licensed lending institutions in the third quarter. Actually, this trend will continue to improve. As you already see in new origination of the platform, majority of the loans are funded by different type of financial institutions. And this trend will continue to, first of all, to diversify the company funding capabilities, which would decrease the risks of dependency on P2P, and even the dependency on any type of particular funding institutions going forward. And the second of all, as we are reaching more large financial institution to deal with funding, and our take rates will be able to improve across the time. But take rate is a relatively complicated question because it's also the function of funding costs, operation costs and also your risks. But particularly about the funding costs, I think we are going to see a trend of improvements down the road.

In terms of your question of the asset quality, as you can see, we are going through a tunnel of industry and macro environment adjustment. So to be conservative in this environment and to be proactive in terms of improving the structure of the portfolio other than increase the size of the portfolio, our total outstanding loans has actually decreased a little bit from an earlier quarter. So along the trend, the denominator decreases a little bit. So it's quite natural, even the vintage loss of our underlying assets stays stable and our short-term delinquency rates can increase a little bit. So far, I think the increase is still controllable, and if you're looking at the transition of short-term delinquency into long-term delinquency, the number is still very stable. And if you're looking at our vintage map of different asset class we're working with, obviously some of the asset classes are actually improving its risks as expected. So we have confidence of continue to maintain our -- high-quality of our underlying credit assets.

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

And thank you very much, everybody, for participating in our earnings call. Have a good night in China.

Thank you, everyone. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.