Jiayin Group Inc (JFIN) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by, and welcome to the Jiayin Group First Quarter of 2020 Earnings Conference Call. (Operator Instructions) As a reminder, we are recording today's call. If you have any objection, you may disconnect at this time.

Now I'll turn the call over to Julia Qian, Managing Director of the Blue Group -- Blueshirt Group Asia. Ms. Qian, please proceed.

Hello, everyone. Thank you all for joining us on today's conference call to discuss Jiayin Group's financial result for the first quarter of 2020. We released the result early today. The press release is available on the company's website as well as on Newswire services. On the call with me today are Mr. Yan Dinggui, Chief Executive Officer; Mr. Charlie Fan, Chief Financial Officer; and Mr. Xu Yifang, Chief Risk Officer.

Before we continue, please note that today's discussion will contain forward-looking statement made under safe harbor provision of the U.S. Private Security Litigation Reform Act of 1995. Forward-looking statement involves inherent risks and the uncertainties. As such, the company's actual result may be materially different from expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filing with the SEC. The company does not assume any obligation to update any forward-looking statement, except 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; and then our IR Director, Shelley Bai, will translate his comments to English. Go ahead, Mr. Yan.

(foreign language)

[Interpreted] Hello, everyone. Thank you for joining our First Quarter of 2020 Earnings Conference Call. Despite the unprecedented global COVID-19 pandemic and rapidly evolving market conditions, we made significant progress on many fronts.

(foreign language)

[Interpreted] Most importantly, we are close to completing the transition of funding sources to institutions. The proportion of loans funded by institutional investors increased to 44.5% in March. And right now, the number of institutions on the platform was 14 and funding nearly all of new loans in Q2. This is a huge accomplishment that puts our business on a much more solid foundation. It is even more impressive because we did it during the lockdown and recovery period from the virus. I would like to thank our team for their dedicated efforts to make it happen.

Right now, we are still in the process of attracting more financial institutions as our new sources of funding on our platform. We initiated discussions with additional 22 financial institutions, in which over 70% of them are banks. We are pleased that we achieved some great progress with some of them, and we look forward to the meaningful cooperation in the quarters ahead.

(foreign language)

[Interpreted] Another achievement was keeping Q1 loan origination volume flat with the fourth quarter. This was also quite impressive in the period during which the countrywide lockdown impacted all aspects of daily life.

(foreign language)

[Interpreted] Furthermore, our optimized business structure enabled us to sustain healthy profitability. Quarterly net income was RMB 39.5 million, up 74.9% sequentially. This is great performance in an environment where many of our peers suffered losses. These accomplishments demonstrate the effectiveness of our prudent strategy, as well as our enhanced risk management system and high asset quality.

(foreign language)

[Interpreted] We realized these accomplishments by executing on our strategy and managing our business with a core set of principles. Since starting our business, we have invested heavily in talent, systems and technologies. Our management team is professional and stable. Our risk management system is evolving through advanced data analytics, behavior analysis and algorithm-driven credit assessment. Our credit management has been excellent and our loan book is high-quality. In fact, our credit loss adjustment under the new accounting policy is rather minor compared to our peers.

(foreign language)

[Interpreted] Now let me turn to developments on the regulatory front. We believe the regulatory environment for our business is becoming much clearer. On May 9, 2020, the CBIRC published the Consultation Paper on the Administration of the Online Lending of Commercial Banks. This is an urgent need for regulators to specify rules regulating the online lending business in order to promote the growth of the industry in a strong and compliant manner. That paper clarified the type of partnerships and loan facilitation services in which banks and online lending platforms can be involved. We believe this is positive and a supportive sign from the regulators.

During the pandemic, people recognized the fundamental importance of fintech services and online lending to the developing world. It has a unique ability to extend the financial inclusion, improve the daily lives of people and spur growth. With our platform now fully transitioned to institutional funding sources, we are well-positioned to reignite growth. We are optimistic because Chinese consumer demand is recovering and the regulatory requirements are becoming clear.

(foreign language)

[Interpreted] Now I will turn the call over to our CFO, Charlie, to review the financials. Charlie, please go ahead.

Thank you, Mr. Yan and Shelley. And thank you, everyone, for joining our call.

As Mr. Yan just mentioned, Jiayin delivered solid financial results in the quarter. In Q1, we continued to operate conservatively but efficiently. As we accelerated the transition from our individual investors to institutional investors, we still strived to reach a good balance between the two. Our loan origination volume was RMB 2.9 billion, flat with Q4 2019.

Despite the virus outbreak and resulting lockdown, we still attracted customers with the right credit profile. Now China has resumed business operations and we see early signs of recovery. In April, nearly all of our loans were funded by institutions. With this accelerated institutional partnership, we expect to resume growth, growing early in the third quarter.

Now turning to the financial results for the first quarter. Please note that unless specifically noted, all financial figures are in RMB. In the interest of time, I will not walk through each item by line on this call. Please refer to our earnings release for more details. I'll just highlight some of the key points here.

Net revenue for the first quarter was RMB 313.5 million, down 57.1% from the same period of 2019 due to decreased loan origination volume. As you may know, since the second quarter of 2019, we purposely decreased the outstanding loan balance, number of investors and the number of borrowers. This was to comply with the government's so-called triple decline policy. Meanwhile, we shifted our focus to higher-quality repeat lenders and repeat borrowers, which reduced the marketing spending and customer acquisition costs.

In light of significant economic uncertainty during the pandemic, we remain vigilant on cost control in order to sustain margins and improve our operational efficiency. Again, we remained focused on serving repeat lenders and repeat borrowers with higher transaction amounts. We were also able to effectively reduce the sales and marketing expense and the costs related to loan originations.

Total sales and marketing expenses fell to RMB 93.4 million, down 45.5% year-over-year. At the same time, the average investment amount per individual investor was RMB 91,318, an increase of 37.6% year-on-year. The average borrowing amount was RMB 7,809, an increase of 8.1% year-on-year. This further demonstrated our strong brand recognition and the lenders and the borrowers' strong confidence in our platform.

G&A expense and R&D expenses fell to RMB 38.3 million and RMB 36.4 million, respectively. This was mainly due to lower share-based compensation expense allocated to G&A and R&D expenses.

Due to stable loan originations, tight cost control and improved operational efficiency, we were able to sustain healthy profitability. We posted net income of RMB 39.5 million, up 74.9% sequentially. As Mr. Yan just mentioned, this was a huge accomplishment given the virus crisis and the temporary reduction in consumption.

Turning to the balance sheet. We ended the quarter with RMB 66.8 million in cash and cash equivalents compared with RMB 122.1 million at the end of 2019. The cash reduction was mainly driven by our business transition and overseas strategic investments.

In addition, I would like to talk about our recent accounting policy change, the adoption of CECL. Effective on January 1, 2020, in compliance with FASB requirements, we adopted the new accounting standard, ASC 326. This introduced the forward-looking expected loss approach, or current expected credit loss, to replace previous incurred loss methodology. Before CECL, credit losses were recognized only when the losses were probable or have been incurred. Under CECL, it requires that the full amount of expected lifetime credit losses be recorded at the time the financial asset is originated or acquired. Adjustments for changes in expected lifetime credit losses are made subsequently, which requires earlier recognition of credit losses that are deemed expected but not yet probable compared to the incurred loss methodology. However as of now, the adoption of CECL has no major impact to the underlying profitability of our business. Jiayin has always focused on risk management and asset quality. The credit loss adjustment impact to us was minor.

The ongoing pandemic has had a material and extended adverse impact on the Chinese and global economies. We do expect gradual recovery in the second quarter. However, considering our business is in the process of making transition, we expect our loan origination volume in Q2 will be relatively lower or at a similar level to Q1. But we are preparing for renewed growth and attractive results in Q3.

Lastly, I have a statement to make. With regard to our unusual stock price fluctuation yesterday, after making due inquiries, we are not aware of the reason causing such fluctuation. We believe we have been in good compliance with SEC and NASDAQ rules since our IPO, and there is no material nonpublic information to be announced after our Q1 earnings release.

With that, let's open the call for questions. Mr. Yan, Mr. -- Ms. Xu, our Chief Risk Officer, and I will answer questions. Operator, please go ahead.

(Operator Instructions) We have our first question from the line of Craig Irwin from Roth Capital Partners.

The first question that I have is about your sourcing of funding from institutional investors. I should say congratulations. The number in your prepared remarks, if I heard it correctly, 44.5% of 1Q 2020 lending funded by institutions, that is a strong, continued progress. And I think you also said nearly all of 2Q lending backed by institutions.

Can you share with us how many institutions are on your platform today, June 11, in the second quarter? And do you expect to continue diversifying lenders over the rest of 2020? Is there a specific number you want to reach this year? And how important is adding institutional lenders to your platform to your longer-term growth plans?

Thanks, Craig, for your question. And I think our CRO, Ms. Xu, will take the question.

This is Yifang Xu. As we have commented on those opening remarks, our overall strategy is shifting from a P2P business model to a loan-facilitation model. So as -- and you have recalled that we have started this journey, call it, less than a year ago. You are correct that we're excited to report today that starting from April, our loan origination is now solely funded by institutional investors. There are 14 institutions that are onboarded and are working with us in Q1. As of now, we will continue to accelerate this effort to try and look at more institutions. As of today, 14 is the numbers we are reporting.

Now on the backlog, we have more than 20 institutions active in negotiation in our pipeline, and that 70% of them are regional and city commercial bank. We continue to receive feedback from our institutional partners, they have been very positive, and the commentary is, all around, the quality and the stability of the assets are outstanding in the industry. In addition, we are also seeking and deepening our relationship with our institution partners, leveraging our core strength and capabilities in online lending and to benefit our institutional partners, including regional and city commercial banks.

So it's very important for us to continue to bring in -- bring on more institutions to our platform to ensure the stabilities and the diversification of our funding sources. So in addition to the loan-facilitation models, we are -- as I said, we're also seeking other possibilities of deepening partnerships with our partners.

My second question is about regulatory. So we observed that the Chinese government has released new rules for online lending by commercial banks. Can you talk about what the impact will be to Jiayin Group and the sector overall with these rules out? And do they directly apply to JFIN and your peers?

So this is Yifang Xu again. I'm going to take on this question. So we -- overall, we view this regulation as a beneficiary to the industry, particularly to the leading players. It certainly promotes a healthier business development environment. The new rule in a way legitimized online lending platforms in terms of business operations and substantially reduced regulatory overhang.

This marks a significant milestone for the online lending industry in China in the loan-facilitation business. It shows that regulatory recognition towards the value brought by online platforms to commercial banks. In terms of that, the online platforms definitely bring value in terms of the better loan operation efficiencies and providing broader access to the credit for the consumers.

So the regulatory development is in line with our anticipation. We are seeing the path [continues] for both the industry as well for the adjacent developments going forward.

My next question is about the quality of the loan book. So the virus impact in the world seems to have had an impact on credit quality for loans by most of your peers. And many of them had large credit provisions this quarter, the March quarter, also for adopting as ASC 326, the new accounting standard. So our assumption is maybe the quality of their loan books wasn't as high as many thought. What is the delinquency status for JFIN? Can you talk about any changes to your loan book? And what's the impact of ASC 326 to JFIN? It seems like it's actually pretty minor.

So Craig, for this question, I'm going to take it from the credit portfolio perspective, and then I'm going to ask Charlie to comment on the implication from the accounting standard.

As we have talked the last time, and I would say that we have -- JFIN has always been following a very prudent and resilient approach to credit risk management. It is certainly a core to our business operation philosophy. So since the very beginning of the outbreak, starting from January, and we have taken a pretty cautious and conservative approach to the loan origination, we're pretty much focused on customers with better credit risk profiles. Most of them are our repeat borrowers.

Secondly, in terms of the loan portfolio as a whole, we have to report that COVID-19 impact to our business is modest, primarily due to the geographic diversity. So multiple customers are not in the pandemic center. But if you're looking back, we'd have to say during the most devastating period, mostly in the February and especially the early February, we also faced some mild operations, particularly in the collection operations, challenges in terms of getting our employees back to work as well as keeping a high standard -- high health standards to protect our employees. So as a result, we did see a modest uptick in the delinquency rate in that particular month.

But as the market recovers from the aftermath of the coronavirus, we are now glad to report that all the risk metrics have shown steady improvement, back to normal, even better than the pre-virus level. So in all from a business side, with all these actions taken and how we managed through this challenging time period, the overall impact on the -- impact from the virus outbreak is modest on our business.

Charlie, do you want to comment on the accounting standards point of view?

It seems we might have lost Charlie.

Sorry about that. I was just muted and I just spoke to myself for a couple of minutes. All right. I will start again. Okay, all right. Okay. Yes.

Craig, I will give you more color about the ASC 326, the new accounting policy just required by the SEC. And just as our CRO, Ms. Xu, mentioned, the asset quality of JFIN has been improved over the past 1 year since our IPO. And we have been investing in risk management system since beginning of our business. And our continued prudent business operation and ever-improving risk management process and data, behavior analytics-driven credit assessment, advanced collection system have generated high quality loans. And our credit quality of our book, I think it's very sound. And the credit losses were very limited. Even with the new ASC 326 accounting standard, I think we are still in a very good position.

As you know, in our Q4 2019, we have reassessed all our loans, and we made a sufficient provision with great effort from our auditor, Deloitte. And thus, the actual provision for our Q1 provision is very limited compared with our peer companies. So that's a very good numbers for us, which also proved that our asset quality management and risk management capability is first class.

That is very impressive. That is very impressive.

My last question is regulatory, but more related to the U.S. market listing and some of the things that maybe are reactionary going on in the United States right now. But the Senate approved a bill requiring Chinese companies have its auditors submit to inspection by PCAOB. And then the NASDAQ has proposed certain rule changes that really seem to be targeted towards many Chinese companies.

I know the PCAOB regulates auditors, not public companies and Jiayin Group is a very conservative company. Can you maybe discuss with us what you see the current status as representing -- the proposals, I think, have 3 years as far as time to comply or resolve. But do you have a potential view on how you would handle things if they were to proceed as currently suggested?

Yes. So Craig, this is Charlie, I will take to this one. And the relationship between China and the U.S. is so exciting right now, right? Everybody is concerned about this and everybody cares about this. And regarding the particular area in the capital markets, I believe that the bill will pass the House of Representatives and be signed by President Donald Trump to become the law down the road, right? Because in the Senate, I think both the Democratic and the Republic, they kind of vote and kind of -- or anyway agree that they will pass this bill. So I don't doubt that the law -- the bill will pass the House of Representatives and be signed by Donald Trump.

But the proposed law, I think they will provide 3 years to resolve the issue of enabling the companies to comply with the PCAOB audit requirements. And the issue of the inspection, I think, is not controlled by the companies. I mean, companies like Jiayin, we're kind of too weak to voice ourselves, given that the PCAOB, they have jurisdiction over audit firms. So at the end of day, I think it's pretty much like betting between CSRC and SEC and it's a betting between China and the U.S.

So since the total market cap of Chinese companies listed in the U.S. is almost like USD 2 trillion, we hope and we believe, right, for the mutual interest of the U.S. and China, a mutual agreement will be reached on both sides eventually. And we are working very closely with our auditor, Deloitte, to keep monitoring the situation and the progress.

The thing I can tell you is that JFIN will do everything we can to fully comply with U.S. accounting GAAP and all the SEC rules. All in all, I think that there's a lot of uncertainty down the road, but we will remain positive, and we will remain confident about the capital markets out in U.S. and China.

(Operator Instructions) Our next question from [Sam Moturu of home].

Can you hear me?

Yes.

Yes. I have made a big investment yesterday, when it is going above 700%. And the kind of recovery I'm looking at right now, I don't see anywhere where I can get back my money. So do you have anything on that? I mean...

Yes. Sure, Samuel. I think the company, the management team, we are as confused as you are. But with regard to our unusual stock price fluctuation yesterday, after making due inquiries, we are not aware of the reason causing such fluctuation. We believe we have been in good compliance with SEC and the NASDAQ rules since our IPO, and there is no material nonpublic information to be announced after our Q1 earning release. We don't know why stocks traded as they did yesterday. All the material information that should be released have been released according to the SEC rules. So as I said, we are as confused as you are. So we need the answer as well. We need the answer from SEC and the U.S. government.

Okay. So what do you want me to continue to do? I mean, I lost like a USD 20,000. So...

Are you based in U.S. or in China?

U.S.

Okay. I mean, in U.S., it's a free country, right? And all investment you do is upon to your own decision. So from the company's view, we disclose all the information we need to disclose, and the investment decision will be made by yourself. And I'm really sorry about your loss, but frankly, I don't know how to say.

Okay. I think I missed the first part of the session. Are we reporting an EPS of -- what is the EPS number?

Again? Sorry about that. Say again? Sorry about that.

What is the estimated earnings per share as per today's call?

Okay. Our net profit for this quarter is RMB 39 million, right? So you can do the simple calculation by yourself. So I will say this is not a great quarter for us if you look at our history. But we are very confident in that given the regulatory policy becoming warmer and warmer, and our efforts on the risk management control, and we are going to regrow our business in the second half of this year. So our EPS or our net profit or our profit margin will be better than today. That's what I can tell you. But with regard to other detailed information, I don't think it's the right position for me to give you more guidance.

Okay. But if it is declared as something fraud, can I go ahead and claim something? Is it something that I can proceed with?

I don't know. As I just said, I'm not sure. For example, I've never talked to you before this call and I don't know what's your kind of opinion or your outlook about our company coming from, right? So you should talk with...

Not just this company. Okay. I'm just looking at some fraudulence recently, and I think it's mostly attacking Chinese companies for some reason. So I will -- yes.

But again, I'm sorry about your loss. But I think the mechanism for the investments in U.S. is somewhat is not correct. Because as I said, we have not kind of -- we have disclosed all the information we have disclosed. And we are also very confused about the stock price fluctuation yesterday. All right?

So I think maybe you can connect with your lawyer and regarding the transaction loss. And for me, yesterday, I talked with the NASDAQ representative, and I tell him everything about the position of the company. We disclosed everything we want to disclose. And I don't know what kind of information you want to get. But for me, that's all I can tell you. All right? Thank you.

Next question is from the line of Craig Irwin of Roth Capital.

All right. So just something that the prior questioner may want to know, that's just securities industry mechanics, right? 100% of the situations like what we saw yesterday in JFIN stock are investigated by both the NASDAQ and FINRA as a part of their market surveillance obligations. And if there's anything nefarious they can track down, they would obviously look to take action. So that's why we all have to be super-compliant. Any small wrong step leads to enforcement actions.

Charlie, my question for you that I didn't ask before, I thought somebody else might want to ask it. We've moved beyond the worst of COVID in China. The virus seems to be tapering down as far as its impact. Your origination volumes may have been down 56% year-over-year, but they were basically flat, essentially flat, in the March quarter versus the December quarter. Can you talk a little bit about how this progresses over the next couple of quarters? Do you expect a rebound and resumption of growth in loan origination volumes? And what do you see as key drivers of this? Is this the economic recovery in China? Or is this the onboarding of institutions that grows that volume?

Yes. Sure. I will give you a little bit color and maybe Ms. Xu can add on.

And for us, as usual, we will not give the guidance, but then you just mentioned that our Q1 loan origination volume was flat compared with Q4 and it's a bigger decrease compared with Q1 last year. But there was a reason for that, right, for the triple decline policy which was imposed in China, and we are trying to comply with the regulation policies. So we tentatively decreased our transaction volume for the Q1 quarter.

But the good thing about this is we almost finalized our transition period. And now in Q2, I would say maybe 90%, 80% of our funding will come from institutional funding. And for Q3 and Q4, definitely, it will be 100%. And since now it's already June, and I can tell you, for our Q2 loan origination volume, which will probably be flat or maybe a little bit lower than the Q1 numbers, but for Q3 and Q4, we definitely will regrow our business.

And the reason for that is, while Q2, we have a lower loan origination volume compared to the Q1, as I said, our Q1 origination volume was not impacted by the coronavirus too much. But for the institutional funding business, actually Q1, we cannot do anything because all our business development team just stayed at Shanghai. They cannot go out and reach out to banks and financial institutions. So for the funding business from the financial institutions, I think it will regrow in Q3 and Q4.

So what I can tell you is, for the second half of this year, we are going to regrow our business, and in terms of loan origination volume, revenue, operational margin and the net profit margin.

Yifang, do you want to add to my opinion?

No more to add on. It's certainly that Q2, we're likely to see at levels slightly lower, but definitely a modest growth in early -- starting on Q3, and further growth in Q4.

My last question is about cash. So at the end of March, at the close of the first quarter, you had cash of RMB 69 million. That was down RMB 53 million over the December cash position. Can you talk about the cash, where we stand now in June? And what the probable outlook is for the June quarter? Do you expect to generate cash, or can you potentially consume cash over the course of this quarter?

Yes. Craig, this is Charlie. I know that the bank and cash position decreased a lot in our Q1 period. And the reason is, I think, due to -- although the loan origination volume in Q1 is similar to Q4 2019, right? But the portion of the institutional funding part business is -- has increased. So the overall revenue take rate for the institutional funding business, actually, they're lower than the individual funding business. Thus, the revenue generated by the loan origination volume actually is lower in Q1 compared with Q4. That's one of the reason, all right?

And in addition, we also inject more capital to our overseas markets, like Mexico, Indonesia, India, in there because we always consider the Southeast Asian market and the Mexican market is a good market for our business. So that's why our cash position decreased as of the end of Q1. And we are expecting that the cash position will become better in second half of this year as long as we keep growing our business in the second half of this year. And the management team is confident that we will generate revenue at a high level and maintain a very healthy cash flow position.

So -- but the second quarter, Charlie, would you expect to be maybe down a little bit more? Is that fair as you continue to invest in your overseas growth initiatives?

Second quarter, I would think, will be largely subject to our investment in our overseas market. And I will say the cash position will probably be at the same level or slightly lower than the Q1 level, but we still want to keep our cash position at a very healthy level.

Okay. Okay. And then last question on this subject. The RMB 53 million decrease in cash for the first quarter over the fourth quarter, what portion of that would you approximate was related to your international growth initiatives?

Yes. Actually, the cash generated from our operating activity, which is very close related to our revenue and loan origination volume, probably will be around RMB 20 million, right? So the rest of them will go to our expansion in overseas market.

Congratulations on the really impressive progress with the institutional funding.

Thank you.

Thank you. And seeing no more questions in the queue, let me turn the call back to Mr. Charlie Fan for closing remarks.

Okay. 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.

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

[Statements in English on this transcript were spoken by an interpreter present on the live call.]