Lexinfintech Holdings Ltd (LX) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the LexinFintech fourth-quarter and full-year 2017 earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today.

I would now like to hand the conference over to your first speaker today, Mr. Tony Hung, Senior Director of Capital Markets. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Lexin's fourth-quarter and full-year 2017 earnings conference call. The Company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman, and Chief Executive Officer; Mr. Craig Zeng, our Chief Financial Officer; Mr. Ryan Liu, our Chief Risk Officer; Mr. [Stanley Zhou], our Senior Financial Director; and [other] members of our team.

For today's agenda, Mr. Xiao will provide an overview of our recent performance and highlights. Mr. Zeng will discuss our financial results. And Mr. Liu will discuss our credit performance.

Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which applies to this call, as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in renminbi.

I will now turn the call over to our CEO, Mr. Xiao, whom I will translate for.

(interpreted) Hello, everyone. Today is the first opportunity since our IPO to discuss with everyone Lexin's development. I am very happy to say, in a changing regulatory environment with increased regulation, we were able to benefit greatly from our past commitment to investing in our financial technology, and we have established a strong competitive advantage. We were able to leverage on our financial technology and these competitive advantages to make rapid progress this past year. Our user base doubled from 2016. At the same time, we were able to achieve scale and profitability. We are very pleased with the strong performance.

In 2017, Lexin's R&D expense increased significantly, by 85% over 2016, to reach RMB235 million or 28% of our operating costs. We also established AI and blockchain laboratories. Today's Lexin is using AI in every part of our operations to increase the efficiency for our customers. To date, over 98% of our orders through AI can be automatically audited, which can save us substantial processing costs.

This past year was also one of steady expansion for our e-commerce business. We established our e-commerce platform in 2013. And as a pioneer in China's installment e-commerce business, the Fenqile e-commerce platform has been a foundational part of Lexin's business. In 2017, the Fenqile e-commerce platform contributed close to 50% of our total revenues. At the end of 2017, our Fenqile e-commerce platform's total SKUs reached 900,000, representing an increase of 50% year on year.

The development of these additional consumption scenarios can satisfy the needs of our customers, and allow the Fenqile brand to gain greater mind share among China's educated young adults. Overall, our e-commerce customers increased 42.5% versus 2016. During November 11 and December 12, Fenqile's e-commerce platform achieved very strong sales. This year, on March 1, our annual spring installment purchase day, we were able to greatly improve on our December 12 sales record, reaching a single-day record high.

This past year was one where we also embraced regulatory changes and built a stable and compliant business. In the fourth quarter of 2017, Fenqile's average effective APR declined from our third-quarter APR of 23.5% to 22.8%, one of the lowest APRs among China's new financial platforms, and contributing to the future development of more ubiquitous finance in China. In addition, we developed an additional system of consumer protections to promote the healthy and orderly development of the industry.

Our continuing investments in technology have allowed us to provide constant improvements to our customer experience. This, combined with a lower APR, has allowed us to win over even more high-quality customers. At the end of 2017, Lexin's registered users reached 23.9 million versus 12 million at the end of 2016. Our growth in users continues to be a key part of our rapid growth.

As a technology platform, Lexin not only attracted more and more financial partners; we also helped more and more platforms with consumption scenarios provide financial services, enabling consumer credit to be more convenient for everyone. This, in turn, encourages consumption and serves China's real economy.

In 2018, we will continue our commitment to investing in research and development and to using our proprietary and highly effective financial technology to provide better credit to China's educated young adult customers. We believe that in the future, our commitment to technology will enable us to develop even stronger competitive advantages and enable us to continue our healthy growth.

Next I'd like to invite our CFO, Craig, to discuss with everyone our results.

Thank you, Jay, and hello, everyone. I'm pleased to announce that we have continued our robust growth trend and delivered a strong fourth-quarter and full-year 2017 results. Our strong performance is the reflection of our commitment to providing superior customer service to our customers in China, and to continue to grow with our customers.

Total loan originations in full-year 2017 reached RMB47.7 billion, up 115% from RMB22.2 billion in 2016. Our total loan originations in the fourth quarter 2017 reached RMB16.4 billion, up 100% from RMB8.2 billion in the same period of 2016. Both these numbers demonstrate our continued strong growth. At the end of 2017, our total outstanding loan balance reached RMB19.3 billion, up 21% from RMB15.9 billion at the end of third-quarter 2017.

Total operating revenue for the fourth-quarter 2017 reached RMB1.6 billion, driven by strong financial service income growth, which grew 62.3% over same period 2016. Loan facilitation and service fee increased by 668% from RMB24.9 million in the fourth quarter of 2016 to RMB191 million in the fourth quarter of 2017, due to primarily to the significant growth in off-balance-sheet loans.

Our growth in financial service income is a reflection of the increase in both the number of active customers and the average outstanding principal balance per customer. We can see a demonstration of this growth in the updated performance of the cohort which we acquired in the first quarter of 2015, whose balance has risen to RMB9,738 and whose 30-day delinquency rate has dropped below 1% to 0.9%, while maintaining a very stable level of quarterly active [rate] at 48%. Our overall average credit limit has reached to RMB8,201.

Funding costs increased by 47.5% from RMB151 million in the fourth-quarter 2016 to RMB222 million. The increase was primarily due to the increase in our funding debts to fund on-balance-sheet loans originated on our platform.

At the end of the quarter, approximately 53.5% of our funding came from our Juzi Licai platform, and 46.5% of our funding came from institution funding partners. Our overall effective funding cost was 8.5% for the on-balance-sheet portion of our portfolio for the quarter.

Processing and service costs increased by 77.9% from RMB38.4 million in the fourth quarter of 2016 to RMB68.3 million in the same quarter of 2017, due to an increase in salary and the personnel-related costs, as well as increases in fees and other costs which results from our strong growth.

Provision for credit loss increased by 102% from RMB93.5 million in the fourth quarter of 2016 to RMB198 million. The increase was due primarily to the growth of the balance of -- on-balance-sheet loans, primarily as a result of our strong growth. Gross profit for the fourth quarter reached RMB434 million, representing an increase of 79.5% from the year before.

Sales and marketing costs decreased by 8.7% from RMB118 million in the fourth quarter of 2016 to RMB108 million in the fourth quarter of 2017. The decrease was primarily due to the decrease in advertising costs. Our sales and marketing [experience] is also expense -- is also a reflection of our high efficient and cost effective customer acquisition strategy. Customer acquisition costs per active customer were RMB99 for the full year 2017 and RMB85 for the fourth quarter of 2017.

Research and development expense increased by 47.2% from RMB45.5 million in the fourth-quarter 2016 to RMB67 million in the fourth quarter of 2017. The increase was primarily due to the increase in payroll and headcount. General and administrative expense increased by 105% from RMB27.6 million in the fourth-quarter 2016 to RMB56.6 million in the fourth quarter of 2017. The increase was primarily due to the increase in the headcount and payroll.

Net income for the fourth quarter was RMB100 million as compared to a loss of RMB12.9 million a year ago. Adjusted net income was RMB126 million, an increase of 436% from the fourth quarter of 2016. Net income per ADS for the fourth quarter of 2017 was RMB0.29 on a fully diluted basis.

Our non-GAAP EBIT reached RMB237 million, which was an increase of the 322% compared with the same period in 2016. For the full year 2017 number, please refer to the earnings release.

Our increase in profitability is a strong reflection of our increased operating leverage. As operating expense as a percentage of average loan balance decreased to 5.3% in the fourth quarter, non-advertisement marketing, advertising, G&A, and R&D decreased to 1.7%, 0.7%, 1.3%, and 1.5% of average loan balance, respectively. We currently have over 7.6 million users with credit line, up from 4.5 million at the end of 2016.

Next, Ryan will discuss our credit situation. Ryan, please.

Thank you, Craig. In the fourth quarter of 2017, and we continued our strong focus on credit control and acquiring the right customers. Our 90-plus delinquency ratio remains low at 1.14%, and we continue to see strong credit performance. As our lifetime [target] ratio remains steady around 2% in 2017, our NPL ratio for on-balance-sheet loans was 1.61% and our NPL coverage ratio was 101.8%.

In addition, we have seen our [credit statistics], the strength of our strategy in growing with our customers. As Craig mentioned earlier, our delinquency ratio for the cohort which we acquired in the first quarter of 2015 is now only 4.9%, which is actually a record low for this cohort. This demonstrates the growth in the establishment of [better] credit by our customers. The continued strong performance (inaudible) to have the potential new initiatives and service to better serve our customers.

We have, and we'll continue to make additional improvement to Hawkeye, one of our key risk assistants, which has now integrated our new customer income forecasting models, one that is superior to traditional models. By integrating the latest AI and big data technologies, we can better assess customer income and on- and off- [part] debt with greater accuracy; that allowing us to better customize and tailor-made our credit products for each of our customers.

With that, I conclude our prepared remarks. We will now open the call to questions. Operator, please go ahead.

(Operator Instructions). Lucy Li, Goldman Sachs.

(spoken in foreign language) Yes. So my question was actually about credit quality. So against the backdrop of the tightening -- regulatory tightening in the space in late last year, I was wondering if there is any [contagion risk] the Company's seeing from the platforms that was getting hurt from the tightening in particular. If the management could share some of the recent credit quality trends, that'd be great.

(interpreted) Yes, so overall, as you understood from Ryan -- and I'll translate for the team briefly. Because we're targeting the educated young adults population cohort, we're going to have limited impact from regulations. In fact, if you look at our latest numbers from the end of the year, the credit performance has actually improved in certain respects.

And as for the performance this year, overall we think that it will be, relatively speaking, steady. It will be basically within the accepted limits.

Tian, do you have another question?

(spoken in foreign language)

(interpreted) So, overall the regulations have clearly impacted that situation here in China for the various new fintech companies. But it's impacting everyone in an orderly way, so long as they're compliant. And everyone as to absorb and adjust accordingly. But you can see clearly from our fourth-quarter results, that had relatively limited impact. Our growth is very much still there. We may need to make certain adjustments, accordingly. And perhaps in the future, we may not be able to grow quite as fast. But overall, again, there's very limited impact, given the overall nature of our business, which you can see in the fourth quarter.

(spoken in foreign language)

Lucy, can you translate the question?

Yes, sure. So the question is on the Fenqile platform. We know that the Fenqile platform is a very good way to attract customers, but we also know [tested] that the online sales is lower in 2017 versus 2016. Does it mean that Fenqile platform becomes less important going forward? Another note: can the management briefly help us to break down how the channels of new customer acquisitions?

(interpreted) Yes, Lucy, so on the first question that you have regarding our overall e-commerce platform: overall if you look at -- if -- whether it's a GMV perspective or an SKU perspective, or from the perspective of third-party marketplace, hasn't really gone down as we have shifted more to a commission focus. And of course we've communicated in the past, the growth [isn't] the key here. It really depends on our customers' needs and how the e-commerce overall fits into that situation. Now, overall, as you know, as we've disclosed, e-commerce continues to be important.

And regarding your second question on the channels, yes; e-commerce is still an important channel. But as everybody know and as we've disclosed, the referral system continues to take up about 50% of our overall customer acquisition. So this is still basically a very key part of our overall customer acquisition, as our particular target cohort is socially connected.

Also, another thing that we've mentioned that we've done is we worked with third parties, including other e-commerce channels. And finally, of course, we've got our own ground-based salesforce, which is actually working directly and cooperating with corporates.

And you can see that our customer acquisition and our number of customers have increased significantly. But at the same time, our customer acquisition costs, especially on a per-customer bases, has actually gone down or remained steady at around RMB100. Now, I want to emphasize here that our focus is not on dropping this cost; but, rather, on developing new customers, and the right customers.

So, overall, if you look at our customer acquisition, there has been no real change. It's been fairly steady. In the future, we're anticipating that there's going to be more in terms of third-party cooperation and working with other organizations, and in particular other financial institutions. So we believe that, in the future, a significant portion of growth will actually come from this third-party cooperation.

(spoken in foreign language)

Jacky Zuo, Deutsche Bank.

(spoken in foreign language) So my first question is regarding to the APR trend. So we saw the fourth-quarter APR was actually lower than the first nine months last year. So was the reason behind -- is that because the increasing portion of existing customers, or because of the change of our product offerings? So what's the trend going forward?

And second question is regarding to the -- follow-up question regarding to the loan growth. So do we have a loan growth guidance for this year? And could you provide us the average loan size for the fourth quarter? Thank you.

(interpreted) So, Jacky, overall, the decrease in APR is definitely part of our long-term plan. And the long-term plan is quite simple: for those who have better credit and who are establishing better credit, they will get a better APR. And this will increase our competitiveness to help us better compete with our competitors. And we all know that bad credit actually don't care about the APR, whereas those with good credit do. So here we have to focus on continuing to give our good customers with the good credit better -- and better APRs, therefore increasing our competitiveness. And this, again, is very much part of our long-term plan.

So overall, because we can provide the lower APR, we can also ultimately take better customers. Which is why you see that, in spite of everything that you've heard and are seeing in the industry, our credit performance hasn't really been affected. And this again comes from the fact that we're able to offer very competitive APRs.

(spoken in foreign language)

(interpreted) So Jacky, regarding your questions with regards to the ticket size, overall we very much have a strategy of growing with our customers and continuing to grow with our customers. So, for example, the ticket size on an average customer probably grew around 40% in the fourth quarter.

To also get a sense of this, and also how to look at our numbers, you can refer to the first-quarter 2015 cohort which we are acquired, which we've also given an update on. You can see how their average loan balance has increased, from originally around RMB3,500 to around RMB9,000.

Now, overall, in terms of bigger-picture guidance, unfortunately it probably wouldn't be fair for us to give that at this time, in this uncertain environment. We very much want to be able to do what we say we will do. So as a result, in this current environment, it's probably fairer for us to not give a direct guidance.

(spoken in foreign language)

Ella Ji, China Renaissance.

(spoken in foreign language) First, I wonder if management can provide an update regarding the detailed execution of all their policies announced in December last year. Where are we seeing in terms of the local government's enforcement of these policies? And for 2018, what is the policy outlook?

And then second question is if management can go through the loan economics for us; from APR to funding costs to provisions, to maybe sales and marketing, customer acquisition costs. Can you give us a trend in 2018 comparing to 2017? Thank you very much.

(interpreted) So, overall, Ella, with regards to your two questions: big-picture, one on regulations, and two on the overall economics. First on the regulations, [this lead] financial regulations are an ongoing, continuing process, given that this is a new industry. Whether in China or the world over, the regulations and the regulatory authorities will continue to look at the market.

That said, even though there are other things to come potentially, the big trends are clear. The direction is clear from the government: high APRs are a no-no; violent collection is a no-no. These are things that we know to be obvious, and that's the clear direction. That said, this is a complex industry. There are different operating models out there; and, hence, the regulatory authorities would need to also look at each very carefully.

Now, that said, the key to all this is that whatever company is involved in this industry must be able to meet all the requirements of the regulatory authorities. That company must have a good base and a good record; must have the right tools in order to be compliant. And if you look at what Lexin has and what we've done in the past, this is very clear from all the statistics and all the things that we have available to us.

With regards to your second question on overall loan economics, overall in the fourth quarter, we are probably starting off still at around 23% to 25%. The big trend is, in terms of the consumer finance, the cost of capital can be relatively less sensitive; but big-picture for the whole market is that it may go up.

On the credit cost, as Ryan has already mentioned, it's quite manageable. We may adjust things based on the needs of the time. And of course, it also is a situation where inherently this is a business where you don't avoid risk; rather, you manage risk. And, hence, we will adjust depending on the situation and the returns.

Now, what I'd also like to emphasize, in terms of what you're asking with regards to loan economics and the overall future performance of our Company: in the fourth quarter, our operating costs over our overall loan balance is down to 5.3%. This shows basically what we've done in terms of achieving scalability as well as profitability. And the scalability and profitability will only grow over time.

Overall, the cost of capital for everybody in this industry can be relatively clear. It's fairly transparent. What is less obvious, of course, is the amount of risk that people are taking on. And there is where basically we would need to be careful and focus on; that, and our scale.

Ella, do you have more questions?

I'm good for now. Thank you. I'll get back in the queue.

Ryan Roberts, MCM Partners.

I actually have two [full] ones. My first question is actually a follow-up on the regulatory topic. I just want to get management's thoughts on how this is going to impact the mix between individual and institutional funding sources. I think that's been something that's been -- can discussed a little bit in the industry, how it's going to impact the future. And I'm curious what that means specifically for Lexin.

My second question is on some -- the split between on- and off-balance-sheet loans. That trend appears to have been in place since 2016, a kind of a gradual mix. I'm just curious where we are on that change in mix.

And additionally, one final housekeeping thing. Just the number of customers at the end of Q -- the active customers at the end of Q4. Thanks.

All right. Give me a second here to translate for the team.

So your first question is what's the percentage of -- or we're talking about a percentage about user and institutional funding partners. I think the thing is that you see all the regulation on this whole financial industry, so it's not only on our sector or on Lexin. What we'll see is the institutions, when they connecting to a new business, they become slower. They have -- there's a whole bunch of things have to go through the regulation on all of the different kind of products they are working on. So this is the whole financial industry kind of issue.

What impacts us is it may take us longer to have more like financial institutes coming in. Used to be is the approval process, probably just a month; now probably it takes a little more, maybe two months. So that's what we see.

Overall, you still see a trend of the increase of the percentage of the financial institutes. If you compare our number versus the end of third quarter, you will see we have a more percentage coming from financial institutes. And we will balance the cost and the source from the -- our (inaudible) and the financial Institute in the future.

Regarding the on- and off-balance-sheet: that is -- we will closely follow all the new regulations. And also we see a trend up toward more off-balance-sheet in the future for our business.

Active customer, I think you can see our earlier release (inaudible) related information there.

Ryan, do you have any more questions?

Sorry. No, that's all for me. Management, thank you very much. And congratulations on the first quarter.

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

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.