Lexinfintech Holdings Ltd (LX) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the LexinFintech first-quarter 2018 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 and please go ahead.

Thank you, operator. Hello, everyone, and welcome to Lexin's first-quarter 2018 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. I am pleased to announce that for the first quarter of 2018, we were able to achieve another quarter of strong results. At the end of the quarter, our registered users reached over 26 million, doubling from a year ago.

Our platform also originated over RMB14.8 billion in loans, an increase of 98% versus a year ago. This was accomplished in a market environment with increasing change. Corresponding with our growth in loan originations, our net profit also achieved strong growth, reaching RMB146 million, an increase of 160% versus a year ago.

I believe that our strong performance is first and foremost the direct result of our stable and highly compliant business model. Since the founding of our business, Lexin has been a business built on consumption scenarios and we were China's first dedicated installment purchase e-commerce platform, serving China's high-quality, high-growth potential customers.

It's through the use of consumption scenarios in our business that we acquired our high-quality, high-growth customers. And it is by serving these customers with our low APR consumer finance products that we will continue to build our competitive advantages in a new regulatory environment.

Our strong performance is also a direct result of our long-term commitment to and our past investment in our financial technology. We spent approximately one-third of our operating expenses on the research and development of our financial technology. These investments have allowed us to achieve greater operating leverage as we continue to grow.

In 2015, Lexin's operating expenses represented 17.5% of our average loan balance. In 2016 and 2017, this figure was reduced to 8.9% and 5.8%. For the first quarter, this number was further reduced to 4.5%.

Today, Lexin is fully utilizing AI and the latest technologies in every part of our business and substantially improving the efficiency of our service. Today, over 98% of all our transactions can be processed automatically with the assistance of our AI technology, allowing us to greatly reduce the need for traditional labor hours and work.

Our stable growth strategy and high-quality customer cohort has allowed us to win the trust of ever more financial partners. In a new regulatory environment where technology companies will be responsible for technology and financial institutions will be responsible for financing, cooperation between financial technology companies and financial institutions will become a major trend and a trend that regulators are encouraging.

Financial institutions have a strong brand and reputation, scale advantages, and funding. But however, lack consumption scenarios, expertise in customer experience, and widespread reach.

In particular, in smaller-sized transactions, traditional financial institutions lack operating efficiency. However, what traditional financial institutions are not good at is exactly what financial technology companies are good at, which gives both sides a strong basis for cooperation.

In the past year, Lexin's Hawkeye credit system, Wormhole matching system, and other technology systems have continued to gain the trust and recognition of more financial partners. In the first quarter of 2018, our loan facilitation servicing fees reached RMB164 million, an increase of 204%. We believe that our cooperation with various financial institutions will create even more value and contribute to Lexin's continued growth.

Next, I'd like to invite our CFO Craig to discuss our most recent financial performance. Thank you.

Thank you, Jay, and hello, everyone. I am pleased to announce that we have continued our robust growth trends in delivering a strong performance on our first-quarter 2018 results. Our strong performance is a reflection of our commitment to providing superior customer service to our educated young adult customers in China and to continue to grow with our customers and our partners.

We have seen a demonstration of this growth: the performance of the cohort which we acquired in the first quarter of 2016, whose balance has risen to over RMB10,500 and whose 30-day delinquency rate is about 1% while maintaining a stable level of quarterly activity rates at 46.5%.

Overall, our average credit limit has increased to over RMB8,600, while our tenor has increased to over 11 months. And our effective APR was at 23.4%. Our total loan originations in the first quarter reached RMB14.8 billion, up 98.3% from RMB7.5 billion from a year ago.

Our total outstanding loan balance reached RMB21.3 billion, up 99.3% from RMB10.7 billion for the same period in 2017. Total operating revenues for the first quarter reached RMB1.6 billion, driven by strong financial services income growth, which reached nearly RMB1 billion for the quarter.

Loan facilitation and the service fee increased by 204% from RMB54 million in the first quarter of 2017 to RMB164 million in the first quarter of this year. Funding costs increased by 46.1% from RMB176 million in the first quarter of 2017 to RMB257 million in the first quarter of this year. The increase was primarily due to an increase in our funding debt to support the on-balance sheet loan originated on our platform.

At the end of the quarter, approximately 61% of our funding came from our Juzi Licai platform and 39% of our funding came from our institutional funding partners. Our overall effective funding cost was 8.6% for the on-balance sheet portion of our portfolio for the quarter.

Processing and service costs increased by 49.4% from RMB44.1 million in the first quarter of 2017 to RMB65.9 million in the past quarter. Provision for credit losses increased by 135% from RMB122 million in the first quarter of 2017 to RMB287 million this past quarter. The increase was primarily due to the increase in the average outstanding principal balance of our on-balance sheet loans.

As a result of our strong growth, gross profit for the first quarter reached RMB412 million, representing an increase of 52.2% from the year before. Sales and marketing costs increased by 17.5% from RMB86.4 million in the first quarter of 2017 to RMB102 million in the first quarter of 2018. The increase was primarily due to the increase in payroll and advertising costs.

Our sales and marketing expense continues to reflect our high efficient and cost-effective customer acquisition strategy. Customer acquisition costs per active customer were RMB108 for the first quarter 2018. And we acquired over 440,000 new active customers in the first quarter.

Research and development expenses increased by 54% from RMB44.2 million in the first quarter of 2017 to RMB68.1 million in the first quarter of 2018. This increase was due primarily to the increase in payroll, depreciation, rental, and share-based compensation.

General and administration expense increased by 37% from RMB42.9 million in the first quarter of 2017 to RMB58.6 million in the first quarter of 2018 due to the increase in payroll and share-based compensation. Net income for the first quarter was RMB146 million as compared to RMB56.3 million a year ago. Adjusted net income was RMB174 million, an increase of 88% from the first quarter of 2017.

Net income per ADS for the first quarter of 2018 was USD0.13 on a fully diluted basis. Please note that the EPS calculation in many consensus calculation was not correct, as they are pulling the GAAP EPS number to compare to the non-GAAP EPS number and using the incorrect unadjusted share count to calculate the consensus EPS. Please note the correct share count number in our financial statement.

Our non-GAAP EBIT reached RMB211 million, which was an increase of 67% compared with the same period in 2017. As Jay mentioned, in the quarter we continued our improving operating leverage. Operating expenses as a percentage of average loan balance decreased to 44.5% in the first quarter. Non-advertisement marketing, advertising, G&A, and R&D decreased to 1.5%, 0.5%, 1.2%, and 1.3% of average loan balance, respectively.

We currently have over 26.4 million registered users, with nearly 8.2 million with credit lines, up from 7.6 million at the end of 2017. For our guidance, Lexin expects the total origination for the fiscal year 2018 to be approximately RMB80 billion. This is our current and preliminary view, which is subject to change and uncertainty.

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

Thank you, Craig. In the first quarter of 2018, we continued our strong focus on credit control and acquiring the right customer. Our strategy of focusing on acquiring educated young adult customers continues to pay off in our strong credit performance.

Our 90-days-plus delinquency ratio remains low at 1.44%. And we continued to see strong performance, as our lifetime charge-off ratio continues to remain at around 2%. In the first quarter of 2018, our NPL ratio for on-balance sheet loans was 1.67% and our NPL capital ratio was 198.8%.

In addition, we have seen the trends of our strategy in growing with our customers, as Craig mentioned earlier. Our delinquency ratio for the cohort which we acquired in the fourth quarter of 2015 continues to be low at only 1%.

With that, I conclude our prepared remarks. Operator, please proceed.

(Operator Instructions) Miranda Zhuang, Merrill Lynch.

Thanks for taking my questions. I have two questions. The first one is about the funding sources. So it seems that the mix of funding from institutions decreased meaningfully quarter over quarter. Can you share with us the trend that you have seen in this funding channel? And how do you expect it to impact your funding costs?

And the second question is can you share with us the mix of e-commerce-related loans versus the cash loans in your outstanding loan balance and in your loan origination amount separately? And what kind of trends have you seen in those two types of loans? Lastly, can you disclose the difference between the delinquency rates of the e-commerce-related loans and cash loans? Thanks a lot.

(interpreted) So in answering the first question with regards to the trends on the funding source, I think it's first worth pointing out that there is a seasonality when it comes to the traditional financial institutions. At the beginning of the year, they tend to put out less amount and the amount set by the government is not official yet. They are still waiting for orders.

Also, simultaneously at this time, our P2P, our Juzi Licai, or wealth management, is particularly popular at this time after Chinese New Year due to the fact that there are many people with bonuses and additional cash amounts that they need to invest. So that's a couple of the main reasons.

Another reason is due to the regulatory impact, where many institutions were waiting and watching a little bit. But since then, we're seeing that they have digested fully the regulatory implications.

And once again, we're growing the amount of money that we are sourcing from institutions. In fact, we are adding something like two or three institutions a month. So I think in the future, that will be reflected in the second-quarter numbers as well.

And you can see from our performance in the first quarter and in the environment the strength of our strategy and the funding sources. How we are able to manage our growth in spite of changing regulatory challenges through having diversified sources and being able to be more compliant than our peers when it comes to the current regulatory environment. So I think this is a strong reflection of our strategy.

So with regards to your question on e-commerce versus non-e-commerce loans, I think it is worth pointing out that in terms of credit, whether it's how we approach it or how credit is done in general, credit is based on the user, on the borrower. It's not based on the consumption scenario per se.

While we do offer consumption scenarios, it's obviously impossible for one side to offer all the consumption scenarios that are possible out there. And ultimately, when we look at credit, it's going to be based on the individual. And not surprisingly, because it is based on the individual, whether the individual is borrowing for a specific e-commerce purchase or drawing down on a cash advance, the credit is the same. So there is no real differences when it comes to the credit numbers.

If someone withdraws cash from their particular line with us and spends it on another e-commerce site, we actually don't see any differences in terms of the credit profile. Because, again, credit is based on the individual; it is not based on a particular scenario.

So we actually see the same credit statistics. So hence, really there is no fundamental difference when it comes to the credit profile of an e-commerce scenario versus a non-e-commerce scenario. Thank you.

Thank you.

Lucy Lee, Goldman Sachs.

So I have three main questions. Firstly is on the off-balance-sheet loan facilitation fee rate. We calculate it that in terms of quarterly fee rate that the fee rate seems to be lower versus previous quarter. We wonder if there's any specific reason. For example, if the banks are less willing to pay us by now.

And secondly, the second question is on the P2P registration process. We wonder if we still aim up for the June registration process? And thirdly, it's on asset quality. We see that delinquency rate has risen to 1.44%. We wonder if we still expect it to rise steadily going forward?

And in the medium to longer term, what's the level that we are looking at? And correspondingly, regarding the loans that we work together with banks, is it possible that we don't carry the credit risk anymore? Thank you.

Yes, thanks. Regarding your first question, let's say we see the [tick rates], actually. It is in a reasonable range that we've been working on. [If a] different time and a different negotiation with different funding partners, especially in a low quarter for the funding partners. So it's some kind of attrition on the rates and on the customers on the first quarter on what kind of assets we provide to those funding source. So it could be a little fluctuation.

Also, different operation rate can also impact this number. But we see the number actually not been changing much, so we see it's still in the same range. So you will see a little change up and down among different quarters. That's basically been in the kind of same level.

(interpreted) So on the whole P2P registration topic, it's clearly one where everybody is focused and certainly we are focused on it as well. Now, unfortunately, there is no new update from the government, and overall the situation isn't that clear per se.

Now, the market rumor is of course that it is delayed and we have heard the rumors as well. But on our end, what we like to emphasize is that we have been fully ready. We have been ready to receive the government and we've been ready to take on the process and to fully comply. But right now, clearly, under the timetable, it hasn't really begun at the level that we would like it to, so the process in that sense is delayed.

Now that said, whenever everyone is ready to begin the process formally, we've been fully ready for a long time. And we are more than ready to in the very, very first instance to deliver everything that the regulatory authorities may need.

So as Ryan indicated, actually our credit quality is definitely stable and everything is very much within range, even if they might be up a little bit. Overall the provisions are up and some other things are up, but it's not something that we haven't seen before for this particular quarter. So it is very much seasonal in some respects.

Now, since December of last year, we have seen some changes in the industry and some impacts to other players in the industry. But because of the fact that we focus on high-quality customers, our educated young adults customers, there's been very limited impact on us.

With regards to your second question on getting more financial institutions to take on more of the credit risk, that is definitely something that we've been looking to do and in fact have succeeded a little bit. And we believe that in the future we may continue to succeed in that aspect. Hope that answers your questions.

Bo Pang, China Renaissance.

So I have three questions, basically. The first one is about regulations. So there are two aspects of my question. The first one is about our very strong performance of P2P in first quarter. So I just wonder whether regulator will have some potential pressure over our growth down the road.

And number two -- the second aspect of regulation question is that -- about the loan facilitation business. I know we've been doing very well partnering with our funding (technical difficulty). However, I also notice that there are a lot of competitors with ours are also rushing in in this model. So I just wonder whether regulators will allow this rush going and will have any potential pressure on this model as well.

So my number two question is about user acquisition. I just want to get an idea on how should we think about the resource allocation between our accumulated [wireless] customer and new potential user acquisition initiative. And whether we are thinking about to develop more user scenario to keep growing our ARPU and acquire more borrowers down the road.

And my number three question is about the guidance. So I know we have our full-year loan volume guidance of RMB80 billion. However, I want to have a rough breakdown in terms of the active borrower accounts and the ARPU growth. And also, I want to have an idea on the split between the P2P volume and the institutional funding as well. Thank you.

(interpreted) So with regards to your question on regulations, the first part regarding the P2P, clearly in the first quarter it showed a significant growth as a percentage. But within this context, what we like to emphasize is that we are fully compliant and this growth was also fully compliant with the rules and regulations.

What the government has gone after is the noncompliant P2Ps and the noncompliant numbers that are out there that need to be reduced. And the government is requesting limits on the growth of that noncompliant portion of the P2P business.

Also, we have to say that being in Shenzhen, a more advanced and progressive city, where the government is very much supportive of our business, we have been perhaps enabled to do a little bit more.

But now, within the context of our overall funding, what I would like to emphasize is that as financial institutions become more comfortable with the new regulatory environment, they will increasingly come back. And our P2P portion will potentially decrease as well.

Ultimately, when it comes down to whether to use our P2P or traditional financing uses sources, we are going to obviously seek to have as many diversified funding sources as possible. And it will come down quite often ultimately to the cost of funding.

We believe, based on the trends that we are seeing from the institutional side, that the institutions are becoming more and more comfortable and the cost of funding from institutions may come down as well.

Regards to the second part you asked about, regulatory environment, which is the loan facilitation model. As I mentioned earlier in my prepared statement, the loan facilitation model can be considered to be a megatrend for Chinese FinTech. But however, loan facilitation also needs to be fully compliant with the regulations in place.

And on that note, we are fully compliant and this is why we believe you will see that there will be more funding institutions and traditional financial institutions coming back to us. And we believe for the second quarter in the future you will be able to see that in our numbers.

So regards to your second question on customer or user acquisition, it's probably worth pointing out again that the key to our growth is not in acquiring new customers. The key to our growth tends to be from our old customers.

Our older customers is a bigger contributor to our overall growth than the acquisition of new customers per se, and this is a reflection in all of our numbers. So this is something that's actually very different in that sense.

And with regards to your question on a white list, well, we are not like the big platforms with a white list per se because we begin the process very differently by picking high-quality educated young adult customers. And these are customers that we pick out very carefully who have stable credit performance to begin with. So to begin with, this is actually quite different than perhaps what you've seen and heard from other platforms.

Now, with regards to the customer acquisition, we continue to see in the first quarter actually that a substantial amount of our customers is coming from referrals. And this is again because our customers tend to be geographically concentrated and have similar needs, similar issues, similar desire for certain consumer finance products. So hence, through the referral we can serve more customers that way.

Now, in terms of your question on new methods for acquiring customers, we've seen increasing growth with our partnerships with third-party e-commerce sites. And by working with third-party e-commerce sites, we are creating new consumer finance products to help their customers. So we saw decent growth there in the first quarter.

Also, we are seeing increasing cooperation with traditional financial institutions. So for example, we have features in their apps whereby we help their existing customers and give them products that otherwise they didn't have before. And this in turn helps us acquire new customers as well. But within all this context, we like to emphasize that when we acquire customers, it's on a very strict basis and a focus on high-quality credit.

Regarding your third question, our guidance, it's -- we have more visibility on our business because a large part of our growth, let's say, is coming from the growth of our existing customers.

Regarding of the new customer acquisition, we have improved to have very effective ways to acquire new customers and it's been very stable. So from the funding side, we see certainly our forecast was based on a couple of things. First, like registration. We will be impacted by registration of our P2P platform, will be more like a stable-like regulatory environment.

But overall, because we have our diversified funding strategy, so our funding sources relatively have more kind of more risk resistance compared with others.

Thank you.

Ryan Roberts, MCM Partners.

Good evening, management, and thank you for the opportunity to ask a question. I also wanted to follow up on the guidance issue, the guidance for the year. It seems like a lot of the growth you mentioned before is from your existing customers.

And one of the things I was wondering about is as the loan sizes and the average loan balances, as those creep up with your existing customers, I would think that the consumption scenarios also would be changing in terms of more larger-sized ticket purchases -- purchase items as opposed to kind of the e-commerce model that has been pretty popular for you historically.

I'm just wondering on the product development front, can you give us any kind of color what you are doing there? I think some of your competitors are pushing into different loan types. And I'm just curious how you are looking at that as a development in the landscape and kind of what your approach is to that. Thank you.

So thanks, Ryan. Let me translate first.

(interpreted) So Ryan, in terms of how we approach things, as you know, we always approach things from the needs of our customers and how to serve them better. So whether it was from the very beginning when we started off with providing financing services for the purchases of smartphones to later on to other items, whether it's PC, laptops, or even apparel, it's always been the customers that has been at the center of our business.

This year what we are seeing increasingly in terms of new products and new product development and new consumption scenarios is an increase in, for example, travel, whether it's points at hotels or vacations. But ultimately, it's all going to come back to the needs of our customers and our ability to serve them. And this is how we will maintain their activity level on our platform.

Okay, thank you. If I could ask -- thank you. If I could ask another question, just about the -- maybe this is more for Ryan on the risk control. So we see that the 90-day delinquency rate increased a little bit in Q1.

I'm just kind of curious, in terms of the credit event that happened at the end of last year. But that's reflective of that. And furthermore, some of the -- I think he mentioned some of the changes or some of the new enhancements to credit decisioning that you were implementing. And I'm just kind of curious if we can get some more color on that aspect.

So let me translate that briefly.

All right. Yes, the delinquency ratio right now probably will get in Q1. And I think that's mainly driven by two different reasons. One is the [net] issues. As you know, normally the Q1 or for each new year is our delinquency ratio will be a little bit high because of Chinese New Year. And also length of February; we only have 28 days. So the credit efficiency, everything will be impacted.

Another major issue is also a mix by the tightening of the cash loan policies. And if you are looking at the last year-end and the government are tightening the cash loan policies. So although we are targeting the overall, the educated young adults, the total portfolio will not be impacted significantly. But there is a small portion of our portfolio that will be impacted. But that is not the major reason.

So mixed together, the delinquency ratio of 90 days rising up a little bit, but is still in a normal range. We are comparing to our -- last year, 2017, the first half with June, the first-half full-year base, and the 90-day delinquency ratio is also 1.42%. So that number is still within the normal range. We are very comfortable with that.

Okay. And just to maybe get a little more color on that, if possible. So you added 440,000 new customers in Q1; you had 570,000 in Q4. So I am just kind of curious: who are these -- I guess, the impact of the delinquency change? Is that new customers or is that existing customers? I mean, it looks like that's got to be existing customers.

And I'm just curious, again, what kind of changes in how you are doing risk control, perhaps, or maybe credit decisioning for whichever group that is, if it's in -- and I'm assuming it's the existing customers. Any kind of color on that would be helpful.

Okay, that's the mix of new customers and existing customers. The majority is coming from the existing customers. But as I mentioned earlier, the main reason is a seasonality issue. So if we are looking at like next couple quarters, so it will be flat.

Okay. So it will be flat with Q1 or it will be flat with the earlier trends?

It's looking like -- if you are looking at our whole profitable number, it's -- 1.4% is our normal range. It's within the same range. So as you will see, we are also doing a lot of tests. So we are comfortable with that.

Got you. Okay.

Jacky Zuo, Deutsche Bank.

I will translate my question. So first one is about cost control. It's a pleasure to see we continue to lower our cost ratio. So what drove down the credit cost? And looking ahead, which area we will see a larger decline in terms of cost.

Second question is about the P2P quality assurance program. Are we still doing this? Or are we in the process to switching to like other guarantee form? So are we still using annualized 4.5% in terms of this quality assurance program?

And third question is about the new credit product. So are we -- on doing this credit card balance transfer, how we are thinking about this sort of new credit products? Thank you.

Thanks, Jacky. This is Craig. Regarding your first question on the cost control, we [basically] see leverage from old perspective of our cost structure, but in the different kind of level.

The highest growth area is the R&D. R&D, we will see less leverage because we keep investing in R&D in our business. But in the other places, G&A and non-advertisement sales and marketing, all those areas we will still expecting to see some leverage. So overall, you can expect that number will keep down as being we have in dollars in the past couple of years.

Regarding your second question on our Juzi P2P platform, we did work with a guaranty company, a [first] company. And the rate is about paying 4.5%. In this area, we will see what the regulators requirements. We will follow their instructions to be comply. Currently, you can also get this information from our 20-F. Our rate will still be 4.5%.

(interpreted) Regards to new products and specifically the one you mentioned on the credit card transfers, it is a product that we have in place since last year. And we can see that recently and also last year there has been good growth in that business segment. So yes, it's definitely something we've done and we've also seen good growth in. Thank you.

[Ricky Ru], ICBC International.

How do management think about the competitive landscape at other e-commerce companies? And online travel platforms also take online consumer financings, an important new revenue driver? Thanks.

(interpreted) So Ricky, regards to your question on competing with other e-commerce platforms, I mean, it's always worth noting that we don't do things based on the market, but rather we base it on our customer. We are very much customer-centric.

And it's not like in the past where JD or [Tabla] or others have not competed with us and have not offered up similar scenarios or products. But instead, it's because we have a very customer- and consumer-focused approach to things that we have been able to differentiate.

So as an example, as we are growing with our customers, the product that we are seeing that they have a desire for is for travel, is for vacations. So hence, naturally, we are growing with them in this particular process.

Now, as we are putting together the packages and the products for our customers, we are approaching it as we had before with an asset-light model, where we are working with third parties. But so long as we are serving the customers well and the customers on our platform, we can continue to offer them these better products at better terms.

It is worth noting that if these customers then try out other platforms, they might actually get very limited amounts of credit because of their limited credit history with the other platforms, if they even have any.

It's also a much longer proof process, where maybe they have to fill out multiple forms to prove that they are a good credit. Whereas on our platform, as our existing customer, all it takes is literally a couple of buttons to get what they need. So hence, this is something that very much differentiates us from our peers who are entering the market.

Thank you.

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