Jiayin Group Inc (JFIN) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Jiayin Group Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Susie Wang, Director of the Blueshirt Group. Thank you. Please go ahead.

Hello, everyone. Thank you all for joining us on today's call to discuss Jiayin Group's financial results for the third quarter of 2019. We released the results earlier today. The press release is available on the company's website 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; and Ms. Xu Yifang, Chief Risk Officer.

Before we continue, please note that today's discussion will contain forward-looking statements made under safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from 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 expect as required under applicable law.

Also please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese RMB.

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

(foreign language)

[Interpreted] Hello, everyone, and thank you for joining our third quarter earnings call. I'm pleased to announce that we performed well in the third quarter. We delivered an attractive level of profitability despite unfavorable industry conditions. Net revenue was RMB 510.8 million, growing slightly when compared to the same period of last year. GAAP net profit reached RMB 81.8 million. While some competitors are ahead of us in transitioning to all institutional funding, our performance definitely demonstrates that we are one of the key players in the consumer finance sector. It also demonstrates our strong brand equity and the trust put in us by borrowers on our platform.

Currently, China's macroeconomic policies are encouraging more consumption and consumer spending is gradually recovering. This is very beneficial to our future development. We firmly believe in the growth potential of our platform, and we remain highly confident in our business. Our top priority at the moment is to sustain profitability in challenging market conditions. Furthermore, we need to intensify our marketing to institutional investors. During the quarter, we achieved solid progress in attracting financial institutions as our new source of funding on the platform.

(foreign language)

[Interpreted] First of all, we merged the operations of Geerong Yun into Jiayin. Geerong Yun is a fintech platform that provides a one-stop solution for customers in 3 stages: pre-lending, lending and post-lending. It uses AI and Big Data analysis tools as the core technology. The integration of Geerong Yun with Jiayin will improve our operational processes by simplifying and accelerating our collaboration with financial institutions.

In addition, Geerong Yun will better support our platform technically. They have mature fraud detection and a sophisticated AI-based risk control model. The model is regularly updated based on the actual performance of customers. This technical support will greatly improve our risk control capabilities. We believe that effective credit assessment and management is critical to the loan business and will form the foundation of our relationships with institutional funding sources.

Presently, we have established funding relationships with nearly 10 institutions. The proportion of loan originations facilitated by institutional partner was 10% in the third quarter and 25% as of now.

We anticipate the proportion continue to grow in the end of the year.

(foreign language)

[Interpreted] Second, we have demonstrated the consistency of our business by sustaining strong cash position and profitability. With this in mind, we are also actively managing our surplus working capital to generate more revenue through prudent short-term investments, thereby creating more value for our shareholders and investors.

Along these lines, during the quarter, we made strategic investments in low-risk, high-potential companies through convertible bonds or fixed-rate lending. We anticipate realizing good returns in these investments over time.

(foreign language)

[Interpreted] Third, we increased our investment in technology and sales and marketing during the quarter. We have always been committed to technological improvement, and thus consistently increase R&D expenses.

We anticipate meaningful advancements in our technology by constantly iteration. We expect the Geerong Yun merger to also drive breakthroughs. In addition, as we started our transition to focus on institutional investors, our sales and marketing expenses have also increased.

As I said before, we are stepping up our efforts to strengthen our marketing to banks and other financial institutions to further increase the proportion of the loan originations facilitated from institutional investors.

(foreign language)

[Interpreted] We have always kept a steady pace, and our solid business and strong brand integrity make us confident in our future. We will accelerate the pace of making our platform bigger and stronger while complying with the regulatory requirements and pursuing our clear strategic goals.

(foreign language)

[Interpreted] With that, I will now turn the call over to our CFO, Chunlin, who will offer more details on third quarter financial performance. Charlie, please go ahead.

Okay. Thank you, Mr. Yan and Shelley. And thank you, everyone, for joining our call today. Our press release contains all the figures and comparisons you need. So I'm not going to repeat all the numbers. Instead, I am going to focus on the factors that influenced results.

Keep in mind that we are referring to the third quarter figures, unless I say otherwise and that all figures are RMB, unless otherwise noted.

The third quarter was crucial to our future, because we demonstrated our ability to execute and deliver solid financial results. The slight growth in net revenue was considered as a success, given the harsh industry conditions, this was due to our increased loan volume, increased funding from institutional investors and inclusion of Geerong Yun results. We expect the contribution from Geerong Yun continue to grow in the quarters ahead. Loan origination volume grew 12.6% as we started to see the positive impact of institutional funding sources. We have completed the trial program and finished the platform integration with institutions. Early indications are encouraging. We expect to accelerate the onboarding of more institutions in Q4.

We continue to invest in technology and product offerings, leading to R&D expenses being up 60% from last year. This is primarily due to our investment in credit scoring technology, staffing and our platform interface to institutions.

Origination and servicing expense were RMB 101.1 million, representing an increase of 3.3%, but this was largely due to the higher expenses associated with credit assessment.

Turning to the balance sheet. Our cash and cash equivalents were RMB 238.0 million at the end of this quarter. As Mr. Yan mentioned, we deployed some of our cash into low-risk, high-potential investments that support our ecosystem. In particular, short-term investments include RMB 71.5 million of convertible bond of a company that is planning a U.S. IPO in the near future. Amounts due from Related Party was RMB 131.3 million. It was mainly due to a fixed interest rate lending we made to a company that has payment [process] (added by company after the call) license and internet small loan lending license.

Finally, I want to mention that we transferred all of our equity interest in Caiyin Asset Management to Shenzhen RongXingBao, an independent third-party loan guarantee company. This transaction had no impact on net assets or our P&L. With that, let's open the call for questions. Mr. Yan, Ms. Xu, our Chief Risk Officer, and I will answer questions. Operator, please go ahead.

(Operator Instructions) The first question comes from the line of (inaudible) Research.

First, congratulations, that's a really amazing performance for this quarter. And so we have our 3 questions here. (foreign language) So first question, could you give us some color on your outlook? And the second one, could you comment on the combination of the ventures (inaudible) -- are you looking for more cost synergy or revenue synergy or other considerations? Third one, it's on your account receivable net. So could you give us some ideas, like what's the percentage of accounts receivable will now be considered into this account? (foreign language)

(foreign language)

Okay. Thanks for the question. We'll give you a little bit of color about our Q4 performance. In general, we think that for our Q4 performance we will be in line with our Q3. And for the full year next year, we are not going to give a guidance at this conference call. And probably we'll give more numbers in our Q4 conference call -- earnings call.

And the second question is about...

(foreign language)

So the second question is about our integration with Geerong Yun and what's the strategic synergy we are taking in this strategic move. In short, there are 2 funds. The first one is related to the branding. Geerong Yun was established in 2018. It has partnered with over 50 banks and small financial institutions to provide technology-based service to enable these institutions on online lending capabilities. In the past, Geerong Yun has been focusing on really on the technology services, which is cloud-based service while the Jiayin Group is transitioning our funding source towards the institutional-based funding. We believe while we are partnering with our institutional partners it's important to have deep and post working relationship with these financial institutions that we are not only just going to be providing loan facilitation services, and we are also helping our partners to build and start their own lending capabilities, including implement such capabilities in-house. So we believe to have the brand recognition to be able to work with Geerong Yun and the lending experiences and the capabilities that we had acquired and accrued over the last 8 years, these are strategic moves that we are seeking in this move.

Okay. So for the third question about the AR. Actually, the AR number on the balance sheet, which was 200 -- more than RMB 200 million as of September 30. Actually, that's the AR net number after our provision of the allowance for the uncollectable receivables. So we consider the whole number will be recovered. And if they're in like AR, it would be kind of little bit difficult to recover then we made more provision. But as of end of September, the whole number -- the whole amount will be recovered.

The next question comes from the line Craig Irwin from Roth Capital Partners.

So we were pleasantly surprised by the gross profit during the quarter. The profitability of your origination and servicing revenue still remains very strong and actually stronger than last quarter. Can you discuss for us whether or not you expect much volatility in the gross margins as you make this transition towards more institutional orders.

This is Charlie, I will take this question. And given the current situation that we are in this transition period, and as our FI funding [currently only] (corrected by company after the call) accounts for small portion of our core funding source and as the financial institution funding source goes up we're expecting our revenue take rate will go down little bit. And in terms of gross margin and net profit margin that will also kind of decrease a little bit based on the revenue take rate and our increase of the cost and expense related to the sales and marketing origination and service expense.

That ties directly to my next question, which is the increased expenses. You communicated last call that they would go up. So we expected the increase, but it's very difficult for us to gauge the magnitude of the increase. So in the third quarter, you were obviously very -- working very hard to achieve the good results of 25% institutional today. But how much higher do expenses really need to go over the course of the next few quarters? Are we looking at significant growth in the December and March quarters as well?

Basically, I think the expense related to the financial institutions will be aligned with the transaction volume going forward. Because it's totally kind of comparable. So -- but of course, with the scale -- scale-up of the transition volume coming from the financial institutions, I think the expense in terms of percentage will even go down.

That's good to hear. That's good to hear. So then the progress with moving to financial institutions, I should say, congratulations, 10% in the quarter is a strong result given that you started fairly recently. And I was surprised when you said 25% today. That kind of points to a trajectory that exiting the calendar year we could be looking at something in the 40% range. Is that roughly accurate? And would you expect to potentially service more than half your volumes of institutional lenders in 2020?

Yes, absolutely. Thank you for -- yes, we have been able to achieve 25% at the end -- as of now, and we're certainly expecting this number continues to grow. We are -- remain very helpful on the results. So to give a little bit of sense of how we are going to achieve that. So currently, we are actively working with almost 10 institutional partners to deliver our 25% results. And in the pipeline, we're also having a healthy pipeline coming up, the number of institutions that we are actively discussing with or bringing them up on board with are close to 30 institutions. So yes, we are -- we definitely remain really positive and hopeful towards that result.

Okay. And then I know it's very early days for servicing customers with institutional lenders, but institutional lenders tend to have an appetite for lower risk borrowers. So when the borrower is lower risk, the delinquency rates tend to be much lower. Are you seeing any change in the delinquency rates on customers you're servicing with institutions? Do you expect your roughly mid-teens percent delinquency rate for 90-plus days to head down over the next few quarters?

Yes, we are -- we are tracking closely on our delinquency rates as well as our 30-day -- 1-day delinquency as well as the 90-day delinquency. We're seeing pretty healthy improvements on that front, particularly related to the portfolio that we're providing to our institutional lenders. We are not going to release the risk of course, for this quarter's release, but we are expecting that we'll be having pretty good pictures coming up in our next quarter when we're discussing these metrics.

Good. My last question is about the regulatory environment. So over the last 3 months we've seen some very significant actions by Chinese regulators taking action to ensure ethical credit collections and people following the fiduciary in how they operate peer-to-peer lending platforms. Do you expect that the actions we've seen over the course of the last 3 months are likely largely behind us or the potential for other companies out there to be impacted is still out there? And would you expect over the next few months that we could see a comprehensive regulatory statement as far as the allowance or disallowance of retail lenders for peer-to-peer lending platforms?

So that's related to the regulatory environment. As of now we haven't seen or received any official guidelines on what is the clear line, what regulatory agencies are looking for on this regard, but what we do have seen is that the government is continuing to tighten the policy enforcement. So the positive enforcement has been around really related to the illegal aggressive loan collections practices as well as some overly excessively high interest rate loan originations.

As for the peer-to-peer companies like us, we are still focusing very much on how to transition our funding sources from the individual funding sources towards the institutional funding sources.

In terms of our asset side or loan origination side, we are -- continue to remain in -- what will remain -- we continue to keep our practice, but we also keep well informed of what our institutional partners are looking for in terms of that type of assets. For example, they have been looking for something more shorter on the duration compared to the type of loans that we have offered before. And we're focusing on that front.

Great. And then just a point of clarification. My understanding is Jiayin Group as one of the largest peer-to-peer lenders in China has always had a very open and constructive dialogue with Chinese regulators. Is this something that continues? It's what I would expect. But can you maybe comment on the frequency and openness of your regulator discussions?

Yes, clearly -- I probably should have mentioned early that we continue having an open and frequent dialogue with the regulatory and the triple reduction has always been the theme of our discussion. And so as far as now that we remain compliant with what our regulator is looking from us.

There are no further questions at this time. (Operator Instructions)

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

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

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