Jiayin Group Inc (JFIN) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Jiayin Group First Quarter 2019 Earnings conference call.

At this time, all participants are in a listen-only mode. The presentation shall be followed by a question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Tuesday, the 11th of June 2019.

I would like to hand the conference over to your first speaker for today, Mr. Gary Dvorchak. Thank you. Please go ahead.

Hello, everyone. Thank you all for joining us on today's earnings conference call to discuss the Company's financial results for the first quarter of 2019. We released the results earlier today. The press release is available on the Company's Web site as well as from newswire services.

On the call with me today are Mr. Yan Dinggui, Chief Executive Officer; Mr. Fan Chunlin, Chief Financial Officer; Ms. Xu Yifang, Chief Risk Officer; and Mr. Wang Libin, a Board Member.

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. The forward-looking statements involve inherent risks and uncertainties, as such, the Company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the Company's public filings with the SEC.

The Company does not assume any obligation to update any forward-looking statement, except as required under applicable law.

Please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi.

With that, let me now turn the call over to our CEO, Yan Dinggui. Mr. Yan will speak in Chinese and our I.R. Director, Shelley Bai, will translate his comments to English. Go ahead, Mr. Yan.

(interpreted) Hello, everyone, and thank you for joining us today. We are pleased to be hosting our first earnings call as a public company. I'm excited to be reporting outstanding results. Because we completed our IPO roadshows recently, most investors will be up to date on our story. So, this call will be shorter than what you can expect in the future.

The big news was our IPO, of course. The fact that we did this deal shows our strength as a company, the individual financial market in China is challenging at the moment, as most of you know. The stocks of most similar US-listed companies are down substantially. However, the U.S. stock market welcomed our listing because we are one of China's top platform. We operate conservatively and have maintained our profitability.

We believe we are in compliance with regulatory laws and regulations in all material effects. And we are positioned for long-term growth for three reasons. First, our strong brand recognition as one of the top marketplace in China. Second, the lenders and borrowers' confidence in our platform. And third, our substantial investments in R&D to further improve our product offerings. Let me briefly touch on each of these.

First, the brand recognition, our Niwodai lending marketplace is one of the biggest in China. In 2018, we ranked third in transaction volume among the platforms doing our type of lending, which is mid- to long-term loans to individuals. We believe that our loan origination volume in Q1 keeps us ranked among the top platforms in the industry.

We invested in brand visibility by increasing our marketing expense in Q1 versus the fourth quarter of 2018. We intend to further invest in our brand over time as our industry starts growing again.

Second, lenders and borrowers' confidence, our U.S. listing is important as it demonstrates the stock market's long-term confidence in our business. The $35 million we raised strengthens our balance sheet. As a public company, lenders and borrowers can see our strong financial results.

First quarter performance was solid, which we believe supports customers' confidence in us. Revenue was stable as the industry moves past the period of peak regulatory uncertainty. Furthermore, we sustained attractive margins while continuing to invest in our business. Chunlin will provide the financial details in a moment.

Third, investment to improve our product offering, our R&D spending is growing as we continue to refine and advance our technology. We are highly focused on credit assessment, for example. We collect a massive amount of data- in full compliance with the law - that we use to improve credit assessments while still protecting the privacy of customers on our platform.

We did a lot of hirings in the credit investment team in order to further improve the key function. Our loss rate continued to decline and we expect even further improvements in the quarters ahead. We are also experimenting with a broader product line in terms of loan size and duration that will better serve the needs of our borrowers.

Finally, we are ramping up our marketing to institutional lenders. Historically, we have been a retail-driven platform, but we believe there is a substantial opportunity to fund our platform through institutions, which are a larger funding source that we can reach at lower marketing costs.

With that, I would now turn the call over to our CFO, Chunlin, who will also more details on our first quarter financial performance. Chunlin, please go ahead.

Thank you, Mr. Yan and Shelley. And thank you for everyone for joining our call today. Our press release contains all the figures and comparisons you nead, so I'm not going to repeat our numbers, instead, I'm going to focus on the drivers and the factors that influence the results, keeping in mind that we are referring to the first quarter figures unless I say otherwise, and that all figures are in RMB unless otherwise noted.

Slower loan origination volume drove the decline in our top-line, general conditions in the individual financial services market are challenging due to the well-known regulatory uncertainty. We believe the major hit from uncertainty is behind us and we expect conditions to stabilize as the year goes on.

You'll see that our loan origination volume and the revenue were stable sequentially. We do not expect about a robust growth until the registration process is finalized and the major players like us are licensed. When that happens, however, we believe there's solid underlying demand for individual loans and the industry should resume growing. While we wait for the regulatory situation to be resolved, we are managing our business prudently closely watching our costs and maintaining profitability by operating more efficiently.

The most important efficiency element is on our platform where we are shifting our focus to repeat lenders, repeat borrowers and the institutional funding sources. As you know, it is far less expensive to serve an existing customer than to find a new one. You saw the effect of this focus in certain key metrics, both average investment and average loan size were up significantly. At the same time, our marketing expense was down significantly versus last year.

When we were more aggressively pursuing new customers, as Mr. Yan mentioned, we did tick up the marketing expense sequentially, in order to utilize our better profitability to reinvest in the business. Even as we watch costs, we are investing in the future. R&D was up meaningfully as we develop new products and new capabilities such as better credit assessments.

Origination and servicing expense was also up as we spent more on credit assessments. Those are good investments. Our loss rate is higher than the industry average and our goal is to improve that, to be at least as low as the best performers in our sector. You can see earlier progress in our allowance for uncollectible accounts receivables and contract assets, which was down versus last year.

The lower revenue and some higher expenses resulted in lower operating and net income versus the last year. However, sequentially, our operating and the net income jumped significantly. This is due in part to our switching investor assurance program to third-parties. This eliminated an ongoing accrual of expected loss expense. This improved our margins.

Turning to the balance sheets, we are in a strong financial position. In addition to the cash we had at the quarter end, we now also have the IPO proceeds, which increases our cash balance significantly.

Contract assets declined significantly during the quarter as did the liability related to the investor assurance program. These changes were both due to the transition to third-party guarantees and better collections. We expect both those line items to continue to improve over time.

With that, let's open the call for questions. In addition to me and Mr. Yan, Ms. Xu, our Chief Risk Officer, will also answer questions. Operator, please go ahead.

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. (Operator Instructions).

Our first question comes from the line of Craig Irwin of ROTH Capital Partners. Please ask.

Good morning and thank you for taking my questions. So, the first thing I would ask -- like to ask is, can you give us an update on the regulatory environment and its role in stabilizing the industry? Do you expect an industry-wide registration regime to begin soon? And could the government maybe start small experimenting with this system working with some of the smaller players before implementing wider regulation?

(interpreted) So, there has been some news about trial registration program and that (inaudible) starting in 2019. However, at this point, we haven't received any formal notice issued towards us nor to any companies in the industry. We continue to cooperate closely with our regulators and we stay fully abreast of new regulations and working hard to be in full compliance. And yet, so far, we are still awaiting for a formal notice.

Thank you. My second question is about regulation as well. So, you explained during the IPO process that the regulators have asked platforms to hold growth to a minimum during this preregistration period. Can you clarify for us, have they asked you to restrain only loan originations or revenue as a whole? Are you allowed to grow other sources of revenue? And also, I noticed your servicing revenue was up significantly sequentially. Could that draw unwanted attention?

(interpreted) So far, we have received a regulator's requirement on limits on the outstanding loan balance as well as number of individual lenders on the P2P platform. We're still anticipating our strong growth of our -- on loan originations. We're primarily just focusing on diversifying the funding sources. We are looking into our loan factor location model. We are expecting to participate -- or partner with banks, small banks, trusts as well as insurance companies to continue to grow our loan programs.

So far, we have setup a dedicated team and built an end-to-end loan servicing infrastructure that will accommodate multiple financial institutions to meet the product requirements as well as the risk appetite.

Thank you. My next question is about marketing expense. So, in the quarter, your expenses way down as you focused on repeat borrowers and investors, and the efficiency there was impressive. But as you said in your prepared remarks, when you get back into growth mode, you'll need to attract new customers to the platform. Can you maybe describe for us what you expect as a normal level of marketing spend maybe as a percentage of revenue when you're out again chasing rapid growth with new customers?

So, I will take this question, this is Chunlin, yes. You can see our historical mode -- and you can see our historical mode and you can calculate that, our marketing spend so then (inaudible) we are in. And I think we'll keep it at that level.

But the one thing is for sure, that because we are going to have more repeat borrowers and repeat investors, our customer acquisition cost will go down. So, in terms of percentage, maybe with the capability of our company, that percentage will go down. That's what I can tell you.

That's perfect. So, my next question before I hop back in the queue. Credit risk assessment, so you did discuss in your prepared remarks that your loss rate is maybe -- or I believe it's a little bit higher than the industry average and that you're working hard to fix this. Can you maybe describe some of the actions you're taking to bring down? And why not engage a third-party credit assessment expert rather than working on internal processes and procedures? For example, I hear China Rapid Finance has a very well-developed system that they're marketing. You have some very healthy margin so you can afford it. Can you maybe describe why you would want to do it internally versus externally?

Sure. This is Yifang. So, I'm going to take that question. So, as Mr. Yan mentioned early, we -- the Company has spent quite a bit of resources to set up our fully functioned risk assessment team as well as invest in the -- in technology such as A.I. and data processing capabilities to continue to develop our risk assessment capabilities.

As you -- your question specifically related to whether we are -- we are going to leverage the third-party -- third-party [services] as we actually have been leveraging third-party services. But in addition to that, we still believe risk assessment capability is going to be the core competencies for the P2P platforms or the future loan servicing capabilities. So, as such, we are going to -- we are -- continue to invest as well as build upon to increase our -- to enhance our end-to-end risk assessment capabilities throughout this loan servicing process.

Thank you. (Operator Instructions). Our next question comes from the line of [Cindy Gu]. Please go ahead.

Thank you. Just to continue the regulatory control question, we understand that the Q1 total loan amount reduced due to the regulatory control. However, under the condition that those regulatory control become a very normal business running environment, how is Company's business development play in the long term like in the next two to three years?

Cindy, please hold on, let me translate for the Chairman.

(interpreted) If I can -- just wanted to speak to that briefly, so, yes, as we see the regulators will continue to find a way to regulate the market, [the peer to peer] market. We are still preparing our next step by introducing a strong -- a variety of the funding sources.

Relative to our peers, we maybe start a little bit late on forming such partnership. However, we did in three years ago, we had a -- we had a -- we had a variety of the funding sources from the financial institutions, but now, we are rebuilt this partnership with the financial institutions again.

In anticipation, we will -- expecting our revenue from this loan facilitation model is going to be consist of -- majority of -- a big chunk of our total revenue sources.

So, thank you. So, my understanding is that the P2P revenue will reduce. And my second question is about the gross margin. And I realized that the Q1, the gross margin has increased compared to the same period of last year. Please explain it a little bit.

Yes, sure. Actually, the increase of the operating margin is mainly due to three reasons. Number one is the increase of the repeating borrowers and the repeating investors, as I mentioned, which resulted in the low acquisition cost, which decreased operating cost a lot.

And the second reason is due to the improved asset quality and the loan collection capability, the allowance for the uncollectible accounts receivables and the contract assets actually in Q1 2019 is significantly lower than the same period of Q1 2018.

And the third reason is since we switched our investor assurance program to third-parties in April of 2018 and we [seized] to make ongoing accrual of expected loss expense thus the provision for the assets and the liabilities around investment assurance program also dropped to zero in Q1 2019. So, all of these factors contributed to the decrease of our operating cost and resulted in the increase of our operating margin.

And I'll just add one point to your previous question, actually, for the P2P business, we are not seeing like it's going down. Actually, we're keeping at a very stable percentage. And just as Mr. Yan mentioned, going forward, maybe in the one or two years, we are trying to decrease our revenue from the P2P business down to 50% and we're trying to increase our funding sourcing from the financial institutions and we'll increase that portion to maybe 50% going forward within one or two years' period.

Thank you. We have a follow-up question from Craig -- from Craig Irwin of ROTH Capital Partners. Please go ahead.

Thank you. So, one of the first questions that I can anticipate from U.S. institutions is, after they look at your gross margins, your cash flow, your balance sheet, they will say, "This is a very healthy company." And the first thing they will ask is, "Why are they doing an IPO?" You don't really seem to need it for your existing business. Can you discuss the strategic considerations for why you chose to complete an IPO and what the plans are for the longer term?

(interpreted) So, we conducted our IPO primarily to provide transparency for our customers on both borrowing side and lending side. Secondly, we -- having the IPO is also helpful for us to communicate with regulators. Thirdly, it provides capital assets for us in the future even though right now, we have [not] in short of the funds. Lastly, it also establish our brand credibility.

Thank you. (Operator Instructions).

There's no question as of this time. And I would like to hand the conference back to Chunlin Fan. Please go ahead.

Thank you, operator, and thank you for all participating on today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Thanks, everybody.

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