9f Inc (JFU) 2019 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to 9F Inc. second-quarter 2019 earnings conference call. (Operator Instructions). Please note that this conference is being recorded today. I would now like to hand the conference over to your first speaker for today, Mr. [René van der Steen]. Please go ahead, sir.

Thank you, Annie. Hello, everyone, and thank you for joining us today for 9F's second-quarter 2019 earnings conference call. The Company's results were released earlier today and are available on the Company's IR website.

On the call today from 9F are Mr. Lei Sun, Chairman and Chief Executive Officer; Mr. Yanjun Lin, Chief Financial Officer. Mr. Sun will review business operations and Company highlights followed by Mr. Lin who will discuss financials.

Before we begin I would like to remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market, regulatory and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties and factors is included in the Company's findings with the US Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law. I will now pass the call over to Mr. Sun. Mr. Sun, please go ahead.

Hello, everyone, and thank you for joining our first earnings call as a public company. Our listing on NASDAQ in August was a significant milestone in our corporate [head wind]. Over the past 33 years, we have developed strong relationships with our borrowers, investors, merchants and financial institution partners, something that we are committed to replicating with our new shareholders.

The market remained challenging during the second quarter as an uncertain regulatory environment continues to hang over the online lending industry and it is not clear where it is all headed. We have been working to evolve our business to ensure long-term sustainable growth regardless of what regulatory environment finally emerges.

In early 2019, we wrote out our tech enablement strategy, which also makes us a provider of advanced technology for marketing and credit divisions and pricing and antifraud to financial institutions and merchant partners across our one-stop and digital finance accounting platform going forward. With over 33 years of fintech operating history, we already have the experience and cutting-edge technology needed to effectively deliver many of this service.

This new business will operate alongside our online lending business and will have us move to more of a capital light business model, reduce regulatory risk, and maintain a strong cash position and provide greater scalability over the long-term. Evolving our business this way provides us with a number of significant advantages in the current environment.

First of all, operating as a technology platform strengthens our liquidity and capital light business model and reduces our regulatory risk. In this new business model we are one of the few personal lending platforms who do not assume any credit risks and our revenue is only generated from a technology-related source. Our institutional funding partners are also all licensed institutions that are highly regulated and have a stricter process put in place to prevent default.

Secondly, we are able to maintain a strong cash position and robust leverage for future growth, [borrow-based] insurance premium indemnity fee and make contributions to deposit accounts. We only charge a technology service fee through financial institutions which can be used as working capital and reduce our need to hold any restricted cash as was required under the guarantee model.

Lastly, the platform's open architecture ensures its open ended scalability and long-term sustainability by -- in cooperation merchant partners with both online and off-line consumers across various consumption scenarios who work with us to drive sales and improve consumer engagements. I'm pleased with the initial result and we are now working on further diversifying our funding sources to drive future growth.

As of June 30, 2019, we had established partnerships with over 20 financial institutions with a total credit line of RMB70 billion. We also continue to invest and acquire licensed financial institutions to -- directly on our portfolio of service, which (inaudible). We strategically acquired a stake in a licensed consumer finance company in China which will complement our consumer credit loan business and diversify the products we have offered.

Also across our business is supported by our expanding new space and the continuous investment in advanced technology that leverages big data, artificial intelligence, and [further] computing to ensure our system can scale with our growth. This September we launched a new service, [9F Quote], to provide customer sites digital finance service for merchants and their financial institutional partners.

9F Quote creates seamlessness between our merchants and their financial institution partners, enabling them to leverage each other's respective strengths in consumer finance and various acquisitions. I'm pleased with the solid results and look forward to leveraging our strong technology and capabilities to provide additional service to our partners.

Loan origination [volume] from institutional funding partners are [growing] (inaudible) and will serve as a platform for future. (inaudible) growth, regardless of which regulatory environment emerges, our focus is on building this business for long-term. I'm meaningfully convinced that this sector continues to generate substantial growth opportunities and I'm confident in our ability to capture them. Now I will turn the call to our CFO, Mr. Sam Lin. Please go ahead.

Thanks, everyone, for joining us on this Friday evening. As Mr. Sun just mentioned, an uncertain regulatory environment continues to hang over the online lending industry, which impacted our performance during the quarter.

To drive long-term sustainable growth regardless of what regulatory environment finally emerges, we began evolving our business into becoming a provider of advanced technology to (technical difficulty) funding merchant partners earlier this year. By loading up our technology (inaudible), this will reduce our (inaudible) and equip us with diversified and scalable funding sources.

Total loan origination broadened during the quarter coming in at RMB9.8 billion, essentially flat sequentially. We spent the majority of April and May carefully fine-tuning the entire technical infrastructure of our lending platform in order to (inaudible) connect to and synchronize with our institutional funding partners as part of technology enablement strategy.

While our performance in the second quarter was affected by the adjustment to our systems, once the process was a majority complete in June, we were especially pleased we see an immediate and positive impact. Loan origination volume in June was RMB5 billion, exceeding the RMB4.8 billion from April and May combined, which we believe effectively adjusts the majority of our underlying asset and strength of our performance.

Net revenue in June were RMB536.4 million compared with RMB510 million in April and May combined. So, we were able to significantly increase the proportion of total loan origination volume that was funded by institutional funding partners to 58% from just 10.5% in the first quarter of the year.

As you can see, the amount of institutional funding partners is strong and we are working to quickly further diversify our funding sources. We expect institutional funding partners to increasingly account for a greater portion of loan volumes going forward.

As of June 30, the number of registered users increased 31.9% year-over-year to 82.8 million, while the number of active borrowers decreased 38.2% to 0.6 million. This (inaudible) us to offer a more comprehensive portfolio of products that cover more segments for our institutional funding partners and help increase our conversion rates.

We also established our presence in certain markets outside of China which we can leverage and apply extensive experience in operations. We have now operations in Indonesia, (inaudible), Thailand and Vietnam. We also work with a number of local banks there by providing them technology [in advance of this].

We also have obtained certain licenses which are critical for expansion in the future. Recently a JV fintech company in Thailand we (inaudible) in conjunction with a local partner was granted a personal loan and loan licensed by (inaudible). I believe we are well positioned to benefit from the high growth opportunity in these emerging markets.

Looking forward, with RMB5.9 billion in cash and cash equivalents and term deposits on the balance sheet of June 30, 2019, and a clear strategy to scale our business in an uncertain regulatory environment, we believe we are well-positioned to sustainably grow our business over the long-term.

Now let's go over the second quarter 2019 financial results in more detail. We believe (inaudible) is the best way to review our performance. All percentage changes I'm going to give will be on the basis of, once again, (inaudible) all figures mentioned in this financial (inaudible) are in RMB.

Total revenue declined, as previously mentioned, 58% to RMB1 billion during the quarter primarily due to a decrease in loan [origination] amount as we transitioned to a (inaudible) lending platform to better connect and synchronize with our institutional funding partners (inaudible) terms. Loans facilitated by institutional funding partners accounted for [55]% of total revenues compared to 60.7% in the first quarter of this year.

Sales and marketing expenses decreased by 41% to RMB394 million during the quarter primarily due to a temporary slowdown in user acquisition. General and administrative expenses decreased by 19% to RMB199.5 million during the quarter, primarily due to a decrease in share-based compensation expenses, which was partially offset by an increase in salaries, benefits and professional fees.

Operating income was RMB256.6 million during the quarter. Net income was RMB171.6 million during the quarter while adjusted net income was RMB205.8 million. On the delinquency side, our cash position remained strong. As of June 30, 2019, our cash and cash equivalents and term deposits were RMB5.9 billion.

Lastly guidance, we currently expect total loan origination volume for the third quarter 2019 to be approximately RMB20 billion to RMB21 billion. This forecast reflects the Company's (inaudible) and preliminary views which are subject to change. With that I will conclude our prepared remarks. We will now open the call to questions. Operator, please kindly go ahead.

(Operator Instructions). [Yuan Zhong], Credit Suisse.

(Spoken in foreign language). Thank you for taking my questions. I have two questions here. The first question is -- can the management please share some more details as to the institutional partners that you are working with? Who are the main ones? And is it all under the credit insurance model?

And secondly, we see that the loan facilitation take rate has declined Q-on-Q and also year-on-year. Can you please share with us the main drivers? And beyond the higher insurance cost, is there a difference in the product strategy between the new model and the P2P model? Thank you.

Okay, thanks so much for the questions. I think I will address the first question first. I think the first question is about the Q3 guidance in the institutional cooperation. I think we have been extending our cooperation with different financial institutions. I think one mainly including (inaudible) connecting a number of other commercial banks as well.

Secondly is about regarding the revenue take rate. I think it does have some [transition] from P2P model to financial institution model. I think it's mainly because (inaudible) we do a little bit different.

Financial institutions like a bank, they tend to have less or shorter time period where the previous P2P model time period (inaudible) longer because the longer period the revenue will ---- (inaudible) revenue had to be higher [followed by recognition] on the upfront. I think the other question about the financial institutions is now all insurance by PICC.

Okay, thank you.

(Operator Instructions). [John Chai], Morgan Stanley.

Thank you for taking my questions. I saw the announcement that we acquired a minority stake in a consumer finance company. Just wonder what sort of benefit do we see from that investment except for the financial investment. So, as compared to our normal business cooperation with a consumer finance company, do we see any other strategic value from that investment? Thank you very much.

Thanks for noting our recent announcement of this investment into the consumer finance company. As you can see, I think we are the second largest shareholder of this consumer finance company. So, we are not purely a financial investor, we are actually a strategic investor. And we are also going to ---- working very closely with the company and also the other shareholder of the company as well.

I think, as you see, there are not many consumer finance companies licensed in China. It's definitely a good strategic investment for us. And also (inaudible) input from us especially from the online capability and also the fintech solutions. So, I think we expect more and more strategic cooperation with this consumer finance company to leverage their licensed associates, their esteemed associates and also by combining our strengths online and also our strengths on the technology side.

So I think, because we just got the approval for this, it's in the process so I think we will reveal more and more cooperation detail in the future.

Thank you.

(Operator Instructions). As there are no further questions I would now like to hand the conference back to our presenter ---- oh, we have one from [Ethan Wong] of CLSA.

A very quick question from me here. So, can management maybe talk a little bit more about the transformation of the business model in relation to the asset quality? Because we're seeing that there's a drop in the delinquency ratio, but from the M3+ delinquency ratio by vintage we are seeing pressure from the fourth quarter in 2018. So, we're just trying to understand the impact of this transformation on the asset quality. Thank you.

Your voice was a little bit low. Let me repeat your question to see whether I have caught your question accurately. So, you were asking the asset quality, right?

Yes, yes.

Okay. So, I understand your main question so far, the asset quality (inaudible) or the future. I think you can see that from the industry perspective they do have some (inaudible) in a company like us and also the other.

We are now also ---- the government is also trying to ---- connecting also to manage the whole ---- reduce the whole ---- the [delinquency] ratio for the whole industry including connecting the online lending platform into the central bank's credit system. So, I think this is going to ---- this is actually a big move and I think this is going to be beneficial to the Company as well.

And I think also you can see that we have more and more cooperation with the financial institutions. And they also have their own requirement and also assets of the credit. And also they have their original pursuits as well. So, I think with all this (inaudible) and also all these new measures in place, we do expect in the future it's going to advantage or benefit for us to manage down the [default rate]. I'm not sure really I answered your questions.

Just very quickly, so if we are expecting an improving asset quality, do we also expect a higher take rate in the future maybe? Thank you.

I think this is really depending on the ---- the cooperation with the PICC insurance company. I think what we see, I cannot say what will the guidance be like in the future. But I think if we can continue to control the default rate, I think it is definitely going to be a benefit to the insurance company and us. And how we speak, how we can see the take rate, I think this is what we will observe for the next couple of quarters.

Okay, perfect. Thank you.

Yuan Zhong, Credit Suisse.

I just have a follow-up question on client acquisition. In the press release you attributed the decline in sales and margin expense to a temporary slowdown in user acquisition in 2Q. I'm just wondering what's driving the strong growth in registered users this quarter. And also what's the client acquisition strategy going forward?

I think because we are now working with more financial institutions and also I think we also try to work with more and more partners, I think, as you know, I think a company like us usually has a couple ways of customer acquisition. One is online, one is ---- I'm thinking of the [broader] side, right? Also from some (inaudible) off-line as well and also for some strategic cooperation. So, like now were working also with (inaudible) all these strategic players.

So, I think going forward we are going to have more and more strategic partners so that we can acquire more customers from all these different (inaudible) areas. I think second quarter, because we -- for the first April and May we still have quite a number of customers from the P2P side. So, I think that could also have some ---- and we are also [trying to control it] down because (inaudible) requirement. So, we can see some reduced on a customer acquisition cost with the volume down as well.

Going forward I think we are ---- with the institutional funding we do expect an absolute amount, it's going to increase. But we are trying to control the cost by working with more strategic partners so that we don't need to fuel [this thing] on advertisements to acquire customers. Next question?

John Chai, Morgan Stanley.

Thank you for taking my questions again. So, I have one more on the regulations, particularly for P2P. Can management share any updates you've heard from the regulators? What's the latest requirements and any updated timetable for the pilot or trial registration? Thank you.

Yes, I think that you can see a lot of news in the market as well. We also are working closely with regulators. I know as far as we know, I think we are still waiting for regulators to come up with a timetable as well. I think you can see a lot of news expecting ---- but I think we won't comment until there is a clear timetable from regulators.

But I do think there is some group [trend] that we can see that now we are allowed to connect to the central bank's credit system. So, apparently I think the regulator is also wanting us to be in a healthy operation situation. So, I think from our side we can only do what we can do to prepare for the [regulation] requirement.

So, as you can see, we have significant cash (inaudible), all the cash are free cash flow. Before we only increased our P2P (inaudible) from the (inaudible) capital to RMB2 billion, which is very high in the industry compared to many other competitors. And we also (inaudible), which is apparently very helpful because our information has been transparent as well.

So, and totally we continue to spend a little time on making sure everything is compliant, making sure everything is ---- can be ready when the ---- if the timetable comes up. So, I think that's what we can do from the company side.

Thank you very much.

(Operator Instructions). As there are no further questions at this time, I would like to hand the conference back to Mr. René van der Steen.

Thank you, Annie. Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your questions, we'd be pleased to answer them through follow-up contact. We look forward to speaking with you again in the near future. Thank you very much, good night.

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