Lexinfintech Holdings Ltd (LX) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the LexinFintech Second Quarter 2021 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, Ms. Patricia Cheng, Head of Capital Markets. Thank you. Please go ahead.

Hi, everyone. Welcome to Lexin's Second Quarter 2021 Earnings Call. Our results were issued earlier today and are available online.

Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and CFO; Mr. Kris Qiao, our Interim CFO; Mr. Jayden Qiao, Chief Risk Officer; and Ms. Beryl He, Senior Finance Director. Jay will first provide an overview of our recent performance and highlights. Kris will then discuss the financial results and Jayden will cover credit performance.

Before we begin, please note that the safe harbor statement in the earnings press release which applies to this call as well as will be -- as well as we'll be making forward-looking statements. The call may include discussions of non-GAAP financial measures. You can find the reconciliation between non-GAAP and GAAP in the earnings press release. Finally, unless otherwise stated, all numbers mentioned during this conference call are in RMB.

I will now pass it over to Jay. His remarks will be in Chinese and translation will follow. Jay, (foreign language).

(foreign language)

(foreign language) [Interpreted] Hello, everyone. It's my pleasure to speak to you all again. The second quarter was a major milestone for Lexin. We achieved all-time highs in several key metrics: loan originations, loan outstanding, operating revenue and net income all made record breakthrough. This is not an easy victory. We have gone through many ups and downs in our journey, and we have always responded with vigor. For those of you that have been following us, you will witness in some of our most difficult and challenging moments and saw firsthand, how the team responded to change and turned the business around especially following the decline in credit performance after COVID-19 last year. The incident makers we think our strategy and carry out a full upgrade of the risk control system, strengthening our capability in managing our risk asset quality. The efforts have been paying off. Our credit performance continued to trend well in the past few quarters. The 90-day delinquency ratio fell by over 100 basis points to 1.85% year-over-year in the second quarter. Sequentially, the level was held steady. Jayden will elaborate on this later. What I would like to highlight is a series of changes we have implemented and the capability that we have built up. They have laid a solid foundation, helping us to face any industry headwinds that may come our way.

Now let me get to what you're most interested in, the regulatory change, especially the 24% pricing cap, how it will affect us and how we will be responding. This will have a major impact on the industry. And in response, we are also embarking on transitioning ourselves. First of all, we will slow down our pace and we will step up the focus on asset quality and profitability of our business model. We have, therefore, decided to lower full year loan facilitation volume to RMB 230 billion from RMB 240 billion to RMB 250 billion previously. At Lexin, a healthy and sustainable business model is more important than scale. We will not sacrifice the long-term health of the company for the sake of volume in 1 or 2 quarters. With pricing affected by the 24% cap, we will embrace on more precision and differentiation in our customer strategy. We will sale back from low-quality customers. We set our risk preference in order to adjust on overall asset risk. For customers currently at below 24%, there is scope for pricing to go up. We will increase the intensity on servicing that group and increase their size. In addition, we will also enhance our operational efficiency with the ultimate goal of maintaining profitability of our business.

The industry will never stop evolving. We are confident that any impact will be transitory and manageable. And once the measures get all put in place, profitability will return to current levels. Ensuring quality and sustainable growth of the core business is a top priority. At the same time, we will also continue to further develop our new consumption strategy. Momentum for Maiya that is our buy now, pay later product remained strong in the second quarter. Working with over 1,000 merchants and serving over 600,000 consumers, it generated GMV of RMB 349 million, more than 5x the amount we got in the first quarter. The initiative will allow us to tap into new opportunities and diversify the revenue base. At the core of consumer finance lies consumption and finance. The 2 can drive a much stronger outcome when they go hand in hand. This is the belief of Lexin and also our core competence. Thank you for your interest and support.

Next, I would like to invite Kris to go through the financials in more detail. Kris (foreign language).

(foreign language)

[Interpreted] We are proud of the performance in the second quarter, customer metrics, top line and bottom line all reached record high. Let me explain the drivers in more detail, starting with the top line. Number of active users reached 8.4 million in the quarter, 24% higher year-over-year. Loan originations rose by 47.6% to RMB 60.6 billion year-over-year and loan outstanding increased by 46.2% to RMB 90.5 billion. Total revenue went up by 10.5% to RMB 3.3 billion as a result, setting another record level. It was also higher sequentially by 11%. Platform-based services income was the biggest revenue driver, up by 47.9%. The product revenue without any credit exposure that is platform-based services plus online services, now made up 1/3 of our total revenue.

Moving on to product cost and funding. Both maintained good momentum in the second quarter. Provisions held steady sequentially, indicating stable asset quality of our portfolio and our ability in managing risk, which Jayden will talk more about later. Additionally, funding costs continue to go down quarter-over-quarter, driven by the positive trends in volume, risk and funding, take rate improved both year-over-year as well as Q-over-Q. While spending in sales and marketing went up in the second quarter is in line with the industry trend and we maintained our discipline in administrative and other expenses from business mix to risk management, funding structure and cost control. Orders came together to drive the 87.7% growth in net income. Amid the regulatory headwinds, we'll continue to stay prudent in risk management and cost management. As Jay said at the beginning, we will not compromise on quality for the sake of scale.

Next, I would like to turn the call over to Jayden to discuss our credit performance. Jayden, over to you.

Thank you, Kris, and Patricia. As both Jay and Kris mentioned, asset quality remained stable in the second quarter. Our 90 days plus delinquency ratio finished quarter at 1.85%, down over 100 basis points year-over-year, that remains steady to first quarter's 1.84%. Moreover, the 30 days plus delinquency ratio improved to 3.37% from 3.6% in the first quarter. In terms of charge-offs, the vintage rate was also stable at about 3.5% for loans originated during the 12 months ended June 30. The new customers that we acquired in the second quarter so far have proven to be as good as first quarter, as shown by the first payment default rate for 30 day plus. FPD30 for new loan originations remained at below 1%. Of course, we cannot be content with our existing efforts. Regulatory changes will lead to changes in industry and credit quality. We need to make sure that our system can screen in quality assets to the right pricing and monitor performance. To this end, risk management remains a key focus. I took on the CRO role earlier this year with a clear mandate to solidify our risk control initiatives. We have been instituting changes before the latest policy changes. These include refining risk strategies across customer life cycle as well as strengthening the risk models for each product and channel. We have also stepped up the collection effort. All these aimed at boosting Lexin's capability to weather any market uncertainties.

With that, I conclude our prepared remarks. Operator, please proceed with question-and-answer session.

(Operator Instructions) Your first question comes from the line of Eddie Leung of Bank of America Merrill Lynch.

I have 2 quick questions. The first one is about the regulation. As Jay mentioned that you guys would be adjusting down the full year loan growth target. So on a user perspective, how would that change our user acquisition channel or our marketing activities? And then secondly, about Maiya, buy now, pay later initiative. Any demographic or user profile characteristics that you can share with us? How these users might be different from the mainstream users of our loan borrower user base?

(foreign language)

(foreign language) [Interpreted] Yes. Let me do the very quickly the translation of this. On the regulatory change, we have decided to revise our guidance because quality is very important to us. So that's why in this process, we need to reduce high-risk users and the purpose is to maintain take rate and profitability of our business. And you can see that the changes that we have to make include funding and also how to service our existing users and also in terms of our customer acquisition strategy. There's going to be major adjustments that we have to do and also we have been doing. And when you -- we have been adjusting our business as a result, for our customers. Now when you look at them and based on the 24% this criteria, we have to adjust how we screen and how we do the advertising. We will not go after small amount loan size and also a high pricing rates. And we also have to strengthen our reach to this core group of our customers. And of course, there will be some increase in the cost. And in terms of the off-line, we will also step up our off-line team build-out. When you look at our credit business, the off-line business, all the pricing is below 24%. And also the asset quality is better than the overall average and also the average loan size is also higher. So this is the channel that's a main channel for us and one that we will continue to invest in. At the beginning of the year, there's about 1,000 people in the team. Now it's about 2,000 now. And we already started to see the impact or the -- in the third quarter. And when we look at the monthly contribution from the credit team, it's almost a double from the beginning of the year.

(foreign language)

[Interpreted] On Maiya, the quality from the Maiya users is significantly better than [Fenqile]. There are 2 characteristics. First of all, Maiya, the product itself is interest-free installment. And when you look at interest rates, naturally, it's going to attract good quality customers. When you have high interest rates, only the poor quality guys would actually would go for the high interest rates because they cannot get loans elsewhere. But for this one it is interest free, so it naturally attracts good quality users. And then second characteristic is data. We do it off-line together with malls and other brands. And nowadays only -- like customers with a certain income level, they would go to malls and these shops. So again, that's why we are able to attract better quality customers this way. And so far, when you look at the potential and risk, we do see that Maiya is better than our Fenqile .

Your next question comes from the line of Ethan Wang from CLSA.

(foreign language) Okay. So I have 2 questions. The first one is around regulatory challenge about keeping the APR lower than 24%. Just wondering if management has done some quantitative forecast on the impact to take rates and loan generation in the next 2 to 3 years? The second question is on the capital light business model. We've been doing the transformation to capital light for some years, but then we decided to keep that percent stable. Just wondering under the new 24% APR cap, is that strategy changed? Or we just want to remain at the current level?

(foreign language)

[Interpreted] We have carried out internal analysis and models on the 24% impact. At the moment, most of our customers in terms of risk profile, they are below 24%. And for this group of customers, definitely, we have scope, we can bring down on the pricing to meet the criteria. And we will keep these customers and their volume. And for the group with risk above 24%, this is the group that we need to reduce. And with the lower pricing, our aim is to bring down the overall risk. And so we have to maintain our asset quality. And on this -- on the profit sharing model, that is the capital-light model that you mentioned, we aim to at least maintain at today's level. But of course, we would look at the mix between profit sharing and risk bearing, we will adjust the mix. And the aim is, of course, to ensure that we meet the requirement and also to keep the asset quality. And once all the measures that we have begun once they are all put in place, we do expect that our take rate would be about 3% to 3.5%. We'll be able to maintain at that level.

Your next question comes from [Chi Yao of MS].

(foreign language) So I briefly translate. The first question is about the new personal data protection regulations, and I just wanted to ask management based on your judgment, which -- roughly what part of deposits can be impacted and should be modified as a result? And is there any preliminary plans and then related to the extra compliance costs, what would roughly be the impact to the cost side? And second question is related to the 24% pricing cap. So just wonder if there any new levers that Lexin can pull in order to -- for lower potential funding costs?

(foreign language)

[Interpreted] On the personal data protection, that one, the principle is based on the minimal requirement. And this is a principle that we have always been following in our data collection process. We have made adjustments to our app as a result in order to make it more compliant, there are some minor changes, for example, in the authorization process. In the past, there was a master authorization. So the new users, they would agree to a master policy. And now in each usage scenario, the individual would have to give a separate permission on it. That's going to increase our compliance cost a little bit, but it's not going to affect the results of our risk analysis. And at the moment, there are a lot of like definitions and also the details actually not yet come out from the regulators, exactly how much change or how much more change we'll have to carry out, we will closely monitor the situation.

(foreign language) Okay.

[Interpreted] On your second question about funding costs. In the long run, we do expect the funding cost to be stable and also to go down a little bit. And with the pricing cap of 24%, that means risk is going to improve and asset quality is also going to be better. That will allow us to tap into more funding partners, and we will also increase the issuance of ADS and we will improve -- that will help us to improve our funding structure and also the funding cost.

Your next question comes from Alex Ye of UBS.

(foreign language) I will translate my question. First one is on your latest development of your SME loans. So I'm wondering whether the average interest rate or cap at below 24% for this type of SME loan? And if it is, then I would presume it would be under less affected by the 24% IRR cap. So would you expect this business to continue to maintain stable growth driver for Lexin for the next year? And do you have any sort of targeted volume contribution for this SME relending business in the next 2 to 3 years? My second question is about Maiya business. Could you share with us the latest development status for this business? For example, the latest growth status for the past few months. And how do you plan to continue to like growth in this business going forward?

(foreign language)

[Interpreted] We started the SME business this year because on our platform, some of the users, they are actually small business owners. So we started this group. We do the lending based on tax and invoices. And the business that we serve include cross-border e-commerce and the auto industry. We took a prudent view in this business because you can see that for the SME lending, the loan amount is bigger than retail. And also the duration, I take longer to see the progression of risk and to monitor our performance. So right now, we are starting with a test sample so we can better observe the risk characteristics and also we can fine tune our risk model. If our risk model proves to be effective, we are going to step up to volume next year.

(foreign language)

[Interpreted] On Maiya, we also started this new business earlier this year. And as I said earlier, the quality has been better than average -- than our average user and also the potential we see strong potential coming from this market. So first quarter, that was a roll out, initial rollout. In the second quarter, we pilot tested the business in more industries. We work with more brands and the feedback from them has been positive. And we do see that there's recognition in China for this business, and that's going to help throughout the GMV. And for some brands that we do offline, they have reported back that the average spending has been going up -- has gone up. And also there's also more additional purchases. And from 3Q, we've been building a regional change. So in the second quarter, we pilot tested in Shenzhen. And now we are rolling it out in a few more cities to further test this business model. Now I'd say that it's still in early stage. But then when you look at the buy now, pay later model, it's present globally. So I do see that there is a strong potential in China. And Lexin is definitely one of the leading players in the area.

Your next question comes from Jacky Zuo of China Renaissance.

(foreign language) So I have 2 follow-up questions. Number one is also about Maiya product. Given we are starting to assemble our regional teams for Maiya, do we have any Maiya GMV guidance for the third quarter? And second question is about also the third quarter. So far, the loan volume and APR color. So for the loan volume so far, what is the expected volume compared with the second quarter? And also based on my understanding, we are just seeing our -- maybe start to adjust the APR. So what is the APR level in the third quarter and how would that impact our net take rate? And also, what is the percentage of the high-risk customers based on our estimate?

(foreign language)

[Interpreted] On Maiya, we do expect meaningful increase from second quarter to third quarter. As I said earlier, we've been building our teams in new cities and going beyond Shenzhen. But of course, more meaningful growth will come after the complete build-out. And at the moment, we do see a meaningful increase Q-on-Q. And also we're trying to bring more cooperation agreements online.

(foreign language)

[Interpreted] On your second question about the APR and take rates. We started adjusting our business as soon as the policy came out. And in July and also August, APR has been in a down trend. And it has led to a lower take rate. But of course, in this adjustment process, risk has also been improving. So therefore, the risk costs will be lower. But how -- it's a bit too early to say because we only started this process, you're not going to see any immediate like numbers, any immediate results. But we do expect that once we complete this process, we'll be able to get a better risk and we'll be able to maintain our profitability.

(foreign language)

[Interpreted] On your third question about the high-risk borrowers in the third quarter, at the moment, if you look at our borrowers with actually pricing risk above 24%. This portion is less than 10%. And in Q3, we have already started to further lower this part. And let me talk about how we do this in terms of our existing customers and also new customers. For our existing customers, definitely, we do expect like higher default, some difficulty in the repayment when the liquidity gets tighter. We're going to manage them through a continuous monitoring. But at the same time, when you look at our new customers, this group, we have fine-tuned our strategy in terms of our customer acquisition in further segmentation. And in terms of your new risk that we are acquiring, it will be much better quality. As a result, it's going to be able to offset the risk coming from the existing customers. Therefore, we do expect a stable performance.

(Operator Instructions)

Operator, yes, I think we can wrap up the call here. If there's any further questions, we can always continue offline.

Thank you. Ladies and gentlemen, that does conclude the conference call 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.]