OneConnect Financial Technology Co Ltd (OCFT) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to OneConnect's First Quarter 2020 Earnings Call. (Operator Instructions) Please note this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Danielle Gao, the company's Head of Investor Relations. Please go ahead, Ms. Gao.

Thank you very much. Hello, everyone. And welcome to our first quarter 2022 earnings conference call. All financial and operating results were released earlier today. The results and today's presentation is currently available on our IR website.

In this conference. We have our Chairman, Mr. Ye Wangchun joining; as well as our CEO, Mr. Shen Chongfeng, who will give opening remarks and Q1 business highlights. Afterwards, our CFO, Mr. Luo Yongtao.

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In this conference, we have our Chairman, Mr. Ye Wangchun joining; as well as our CEO, Mr. Shen Chongfeng, who will give opening remarks and Q1 business highlights. Afterwards, our CFO, Mr. Luo Yongtao, will offer a closer look into our financials, and then in Q&A section our Board Secretary, Mr. Michael Fei; and our Chief Technology Officer, Mr. (inaudible), will be available too.

Before joining, I would like to refer you to our safe harbor statement, in our earnings press release as we will be making forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that we may present both IFRS and non-IFRS financial measures as well as an net interest profit margin. A discussion of the limitation of non-IFRS and its reconciliation to IFRS measures are included in the earnings press release.

With that, I'm now pleased to pass the call to our CEO, Mr. Shen Chongfeng. Shen, please.

[Interpreted] Good morning, everyone. I'm Shen Chongfeng. Thank you for taking the time to joining OneConnect's 2022 First Quarter Earnings Release. In the first quarter, the global economy experienced greater uncertainties due to instabilities and COVID outbreaks. Nevertheless, OneConnect overcame these difficulties and kicked off 2022 with stronger performance.

Total revenue reached CNY 1.02 billion in the first quarter, representing a year-on-year growth of 24.3%. At CNY 340 million, third-party revenue was up by 10.5% year-on-year. Adjusted net loans ratio with near double-digit improvement narrowed to 27.6%. Our strong results in Q1 came from excessive execution and implementation of second-stage strategy and the concerted efforts of everyone at OneConnect.

In addition, on the share repurchases that we announced on February 1 this year, OneConnect has purchased 4.2 million ADRs which amounts to USD 5.85 million as of the end of April. We plan to use these shares for employee incentive plan. And on our Hong Kong Exchange, we have maintained close communications with Hong Kong Stock Exchange after submitting our A1 filings on February 28. Our listing plan was executed smoothly per our schedule. These efforts involving OneConnect and the management's commitment to sustained and healthy development in the capital market, as well as our confidence in OneConnect's future.

Of course, we do recognize that there are increasing economic uncertainties in China due to recent COVID outbreaks, but we believe the negative impact is on the way and our continued focus on diversified product development and shift to a more stable revenue model, which charges on stock volume will also benefit. Over the long term, the potential of the financial technology industry remains immense. The total plan of banking IT solutions in China will reach RMB 127 billion by 2024, a CAGR of 25% according to an IDC estimate. We therefore remain extremely positive about the development of the industry.

Looking forward, OneConnect will continue to embrace our vision of technology creating value and expertise and focus on transformation, breakthrough and high-quality development, which is -- are seen for operations in 2022. We will further improve third-party revenue, sustainable revenue and profitability through persistent efforts in production and ultimately generate value for our customers and returns for our investors.

Next, I'll give you an update of OneConnect development in the first quarter. You can go to the Page 3 of our slide. As previously mentioned, there are increasing uncertainties in economies across the world. Finance is an important leverage for macro adjustments. We have a bigger role play. Financial technology, a driver for development in the financial industry have naturally become an important focus for the Chinese government. The government has introduced a number of policies supporting the fintech industry this year. Fintech development plan issued by PBOC, for example, match our top level design for a new stage fintech development and set the target and direction in the coming 4 years. A new document called CBIRC this January, the guidance on digital transformation of making and digital sectors has placed strategic importance on digital transformation. The next 3 years is expected to be the crucial window where financial institutions become competitive digitally.

And today, we see high level growth in the industry. Data shows that between 2016 and 2020, ROE in the banking industry has been declining and by an increasing margin. To break this pattern, banks want to empower their business through technology. And we can see from the numbers that those with growing technology inputs will maintain a relatively high ROE. Technology investment in the banking industry is expected to grow at a CAGR of 24%, and that sells a great opportunity for OneConnect's development.

And now please go to Page 4. OneConnect is currently is on phase 2 of development, which focuses on customer upgrades. As the financial technology industry in China has established the basic framework and is now on its way to transform financial services, OneConnect has also wrapped up the customer acquisition stage and invest on our second stage development of customer upgrades and product integration.

Next, on Page 5. On our Open Day last year, when we announced our second stage strategy, we talked about customer upgrade and product integration. In the first quarter, we are delighted to report that we have made some breakthroughs in both banking solutions and the relatively new gamma platform. In the Banking division, we continue to deepen engagement with customers and more high-value customers. We also see new products from gamma platforms, including core banking, AI customer service, gain more market share.

Next, on Page 6. Next, I want to talk about our product integration and upgrade efforts, especially how our mature products are expanding to high-value customers. Digital financial inclusion platform is a business to our technology integrated products designed by OneConnect for small and medium-sized banks. It includes a data layer and a credit lending core covering the whole lending process from customer acquisition to loan application and incorporate comprehensive solutions of marketing, risk management and scenarios. This platform has been used by over 2 million SMEs. In Q1, the product has helped us successfully upgraded 2 trillion AUM joint stock bank, Shanghai Pudong Development Bank and Quanta Bank to premium wealth customers, with contract value reaching as much as CNY 10 million. One of our customers doubled its SME loan volume within 6 months of using our platform.

Next, please go to Page 7. On this page, you see another example of one of our mature products, retail banking. With product integration in the retail banking, we have now for marketing, large management and smart wealth management.

Smart Marketing is an end-to-end online management role for bank managers with 100% coverage of their daily work. This drove good efficiency of retail customer acquisition. Smart management is a mid-office platform covering 8 functions, including customers, products and marketing. Built on micro services and with everything componentized and considerable, the technology system also enjoys higher flexibility. Smart wealth management serves both investors and advisers in wealth planning, portfolio recommendation, advisory so and forth.

The product empowers wealth management to become more digitalized and smarter. In Q1, this solution has successfully secured 2 trillion AUM debts, that 1 joint stock and 1 major rural commercial with contract value approaching RMB 10 million. Our solutions have achieved 100% coverage of their relationship managers empowering up to 10,000 managers. We are also happy to note that it is thanks to constant cross-sell and upsell that we were able to make progress with large financial institutions. Customers started with single modules and gradually adopted more and more modules, and now will use our integrated solutions and multiple products, which means higher ARPU and customer stickiness for OneConnect.

And next, please go to Page 8. Next, I will give you an update on some of our new products. Core banking system. As the power engine of banking systems, core banking system upgrade is an inevitable step in information infrastructure upgrade and digitalization of banks. OneConnect has developed a cloud-native core system that supports the 3 core businesses of banks, namely lending core, deposit core and payment platforms. With only one single platform plus customers can access multiple scenarios with merchant onboarding efficiency improved by 60%.

In terms of system structure, the system is decoupled, supports configuration at the individual customer level and can be deployed within 1 week, which is very rare in the industry. Since its launch last year, we have already sold the product to over 10 banks -- to 10 bank customers. Core banking system also generate higher value from customers. In Q1 alone, 3 have become our high-value customers with the use of core banking systems.

And on Page 9, you see another case of our new products, AI customer service. Thanks to our expertise in financial services, our AI customer service solution has evolved from customer service to diverse applications covering smart collection and smart marketing which translates to reduced cost and increase revenue for customers. So far, over 30 third-party customers have used this solution. In the first quarter, 3 major customers, including trillion AUM joint stock banks and regulatory customers have started to use this solution, applying it to scenarios including customer service and marketing. Our solution has boosted productivity of customer service representatives by 20% and achieved an extensive AI model coverage rate of 94%.

And please go to Page 10. Lastly, I would like to share with you some of our thoughts on COVID outbreak relapses. In the first quarter, a small part of our business has been affected by COVID outbreaks, and we expect our business to be influenced in 2 ways this year. Firstly, on the implementation type business. due to travel restrictions, contract signing and implementation will be delayed. Secondly, transaction volume-based business is likely to be affected as a result of limited business activities on our customer side. For instance, banks couldn't carry out offline lending, auto insurance claims and car ecosystem volume in East China plunging because of citywide lockdown.

We have proactively taken measures to counter these influences. For example, we focus more on operations and conversion of volume from our existing customers and have launched electric vehicle jumpstart services on our car ecosystem platform. We will also activize contract signing and delivery of implementation projects after restrictions have eased. Part of volume-based business is expected to experience a surge as business delayed by COVID outbreak resume and will taper off to average level.

Despite impacts from COVID outbreak on parts of our business, we're not too concerned as we have a diverse portfolio with risk management services, operation support and cloud and so forth which has been added into financial institutions everyday businesses, charge of volume of stock business and therefore, are more resilient.

And with that, I'll hand it over to CFO, Luo Yongtao, to brief you on our financial performance in the first quarter. Luo, please.

Okay. Thank you, Shen. Good morning, everyone. Now I will introduce the initial sort of in the first quarter. I would do my part in English.

Despite the COVID impact, we recorded a satisfied Q1 results. Just as Shen said, we have achieved a 24.3% year-over-year top line revenue growth to RMB 1.02 billion from RMB 820 million in the same period of last year. Revenue generated from third-party customers reached 10.5% growth to RMB 341 million from RMB 309 million in Q1 2021.

The net loss to shareholders for the first quarter was RMB 318 million. Our adjusted net profit margin, excluding a one-off Hong Kong listing expense in this quarter achieved an improvement of 9.6 percentage points year-over-year to negative 27.6%.

On Page 13. Looking into the revenue breakdown by customer type, you can see that we have maintained a relatively stable customer mix in the first quarter. Our third-party revenue contributed 33.5% of total revenue in Q1, which rose 10.5% year-over-year. Third-party revenue growth was largely driven by increased demand for risk management and operation support services, which are key focuses of our second stage strategy.

However, the COVID lockdown did have an impact on our third-party customer revenue which was reflected in a decreased implementation revenue in the first quarter. Looking forward, we believe such impact is limited and the business will recover soon after the lockdown to be lifted in major cities.

In the first quarter, Lufax contributed 12.7% of our total revenue. This revenue rose 71.9% year-over-year to RMB 129 million from RMB 75 million. The growth was largely driven by cloud services, risk management and new project implementations.

Ping An Group contributed 54% of our total revenue. Revenue from Ping An Group rose 25.9% year-over-year to RMB 549 from RMB 436 million in Q1 last year. The growth was mainly driven by the increase in demand for operation support and cloud services. Looking forward, OneConnect will continue to play a critical role in Ping An Group's financial technology ecosystem.

As always, OneConnect regards Ping An Group as our most important flagship client. The services provided to Ping An Group are core technology solutions, which have been deeply embedded into Ping An Group's daily operations.

Our services to Ping An Group also have a proven record of success. For example, in the area of AI technology services, Ping An Group has enabled AI agents through our AI technology to optimize and transform business processes to improve operational efficiency and customer experience.

On collaboration, Ping An Group are robust and highly sustainable, evidenced by that in Q1. The majority of the revenue are generated from operations support, risk management and cloud services, which largely charge our stock business volume. Therefore, we expect our revenue from Ping An Group to maintain steady momentum.

Page 14, moving to our revenue mix by business type. Cloud services remained as the biggest driver of our revenue growth, accounting for 29% of total revenue. It achieved a 63.9% year-over-year growth to RMB 296 million in the first quarter this year compared to RMB 181 million in the same period last year.

Benefiting from Ping An Group's ongoing digital transformation, more and more subsidiaries and affiliates are adopting our cloud services, including Lufax. As such services charge on daily IP operation volume, we expect to see steady revenue growth from cloud services in the future.

As one of the key strategic focuses, risk management services contributed 10% of the total revenue and achieved a 7.7% year-over-year growth to RMB 107 million in the first quarter of 2022 from RMB 99 million in the first quarter last year. Both solutions in our digital banking and digital insurance contributed to the growth. Revenue generated from Lufax and third-party customers were both showing growing demands.

Moving to operation support business. Largely benefiting from AI customer service solutions and auto insurance services, operations support contributed 25% of our total revenue and achieved a 20.2% year-over-year growth to RMB 255 million from RMB 212 million in the same period of last year. Implementation revenue contributed 17% of total and achieved a 1.8% year-over-year growth to RMB 172 million from RMB 169 million in Q1 2021. The lockdowns in major cities resulted a temporary drop in our third-party customers. Meanwhile, the implementation revenue from Ping An Group returned to growth in the first quarter, which aggregately led to a slight increase in this sector.

Benefited from our second state strategy, other services were developing well, especially in overseas business and auto insurance ecosystem. It contributed 6% of our total revenue and achieved 130% year-over-year growth to RMB 63 million in the first quarter of 2022 from RMB 27 million in the same period of last year. As you can see, our business are diverse and well balanced, and we are establishing more solutions in technology infrastructure. Although the COVID outbreak this year has indeed brought uncertainties to the market, not the economy, we remain committed to diversifying our products and continuing to adopt stock-based charging model, which is highly stable and sustainable to more businesses.

Next page, I would like to discuss the revenue mix by business segments. We maintained a stable revenue mix by segments. Gamma platform were the biggest contributor. On top of the cloud services, newly developed products such as core banking system also boosted in the first quarter, contributing to gamma platform growth. For other segments, digital banking accounted for 31% of our total revenue. Digital insurance accounted for 18% and the virtual banking business accounted for 2%.

Page 16 is our premium plus customer. In our second stage strategy, we focus on higher-volume premium plus customers. In the first quarter, our premium plus customers reached to 74 with a 16% growth on a year-over-year basis. Most of them are from our existing customers, which demonstrates the effect of our intensive funding strategy. And the newly acquired premium plus customers are mainly from digital banking and the gamma platform.

Next page, let us look at the gross margin. In the first quarter, on the IFRS basis, gross margin slightly increased by 0.3 percentage points year-over-year to 34.3%, while our non-IFRS gross margin dropped by 4.7 percentage points to 38.8%. We saw that our mature products are actually making progress improving gross margin. For example, SME banking as a digital banking and insurance products. However, the newly launched products really had lower gross margin. Also in Q1, some of the implementation revenue was delayed due to the COVID outbreak while rather the cost kept occurring, resulting in a lower margin in the implementation sector.

Those factors checked down the total gross margin level. As a young technology company, we are still heavily investing in research and development on utilizing capitalization. So it is more suitable to look at non-IFRS margin when compared to other competitors who have already been established for a longer time period.

Next page, we will take a look at expenses. In the first quarter, we kept spending on research and development to strengthen our technological capabilities, product upgrades and enhancements. The research and development expense rose to RMB 363 million in the first quarter 2022 from RMB 281 million in the same period of last year. It accounted for 35.6% of our revenue this quarter, which was 1.3 percentage points higher than Q1 2021.

Next, the sales and marketing expense reduced to RMB 109 million in the first quarter of 2022 from RMB 167 million last year, accounting for 10.7% on with 9.7 percentage points improvement. The COVID impact is one of the reasons, we travel less and spend less on marketing activities during the lockdowns. For general and administrative, excluding one-off listing expense, we saw a significant improvement in the ratio. The adjusted G&A expense dropped to RMB 75 million in first quarter 2022 and accounted for 17.2% of our total revenue, which was a 4.9 percentage points improvement on a year-over-year basis.

Moving to operating margin on the right-hand side. In the first quarter, our operating loss slightly rose to RMB 318 million from RMB 346 million in the same period of last year. The operating margin improved to negative 34.8% in the first quarter by 7.4 percentage points from negative 42.2%. If we take out the one-off expenses, adjusted operating loss ratio dropped to negative 31.2%, which improved by 11 percentage points on a year-over-year basis.

In respect of net profit margin, in the first quarter, our net loss to shareholders rose to RMB 281 million from RMB 305 million in the same period last year. The net profit margin improved to negative 31.2% in the first quarter from negative 37.2% in the same period of last year which was a 6 percentage points improvement. Again, if we exclude the listing expense, the adjusted net loss ratio dropped to 27.6%, improving by 9.6 percentage points on a year-over-year basis.

This year, we will focus on 3 key financial metrics which are also of benefit to our investors. They are third-party revenue growth, sustainable revenue growth and path to profitability. In previous session, our CEO has reiterated on the first point. For the second point, we remain committed to diversifying our products to retain a sustainable growth and gradually moving to adopt stock-based charging model to more businesses. For example, AI customer service offering support for both banks and insurance and cloud services. Given the nature of the revenue model, they are highly stable and sustainable. On the third point, let's look at the next page. The path to profitability comes from multi effects. First of all is gross margin. We will improve gross margin by ongoing product standardization. At the same time, our professional sales team will help our customers to design more standardized solutions to minimize customization requirements.

We will continue to invest in research and development resources on technology and the core products as we believe it lays the foundation for our future competitiveness. However, we will only allocate resources in our core technology products with a higher investment return. We do regular performance review and phase out those products which do not fulfill the requirements. We will strengthen our sales team's capabilities and improve their productivities. For general operation expenses, we will keep following the stringent cost control measures and expect a continuing downward change in the revenue ratio in the future.

We summarized the key financial metrics as well as non-IFRS reconciliation details in the following 2 slides for your reference. Now I will hand back over to Danielle. Thank you.

Thank you, Yongtao. Operator, we are ready for questions. Please open the line.

(Operator Instructions) The first question is from the line of Timothy Zhao with Goldman Sachs.

(foreign language) 2 questions from my end. First, I think from the product revenue contribution perspective, with the cost services become the largest revenue contributor in the first quarter, for the first one, could you management share some color on the gross margin profile of the platform services? And how should we look at the third-party revenue contributions in terms of the contribution growth within cloud services?

And my second question is on the virtual banking because this is the first time to disclose the revenue contribution. Could management share some color on how we should look at the revenue contribution from the overseas business? And what is the detailed plan ahead?

[Interpreted] This is Shen Chongfeng, I will answer your first question. On your first question, on cloud, the business nature of cloud is actually different. Due to higher percentage of hardware in business -- in cloud, the gross margin is different from our other products.

The financial cloud mainly serves financial institutions, and that means higher requirements on security and data protection. And as financial institutions are going through digital transformation, most of our SaaS and the past applications are based on financial cloud infrastructure.

On the third-party revenue contribution in financial cloud, we do see flat growth in the first quarter, and that then has something to do with our (inaudible) previously. Year-on-year, the revenue contribution from financial cloud grew year-on-year by 7x. The absolute amount remains low, however. And our license for group cloud business is still being reviewed. That means we can't officially launch cloud financial services yet. The fast growth in third-party revenue contribution in financial cloud will demonstrate our strength of this product, and that we are proactively preparing for future business development.

The second question is about the overseas business. Michael Fei will take your questions.

(foreign language) On overseas business, here you on the disclosure titles, PAOB, but actually it includes our revenue contribution in Southeast Asia from digital banking and the gamma platform. Together, these 2 solutions have contributed over 10% of our revenue contribution from third parties and that is quite significant.

And in overseas business, we have very clear proposition. We are one of the very few players who can provide end-to-end solutions to our customers, and we see great potential in overseas. And PAOB is one of our good example of excellent products in the last year.

Different from other virtual banks in Hong Kong, our strategic focus is on serving SMEs, and we are using OneConnect's SME lending solution to serve small and medium-sized enterprises in Hong Kong. In 2021, 26% of small- and medium-sized enterprises experienced their first time in securing a loan from a bank, and that's provided by PAOB. And the quality of these loans are actually very good, and we only saw one nonperforming loan last year. Overall, we remain positive about our development in overseas.

The next question is from the line of Xinan Zhao with Orion SEC.

Congratulations on the financial results. And I have one question about the Hong Kong listing plan. And could you please update us on the Hong Kong listing plan? (foreign language)

Yes. Thank you, Xinan. Michael Fei will take this question.

(foreign language) I think the progress is well on track. We already have 2 rounds of communication with Hong Kong Exchange and SEC. We are hopeful in the short term, we will achieve our target.

The next question is from the line of Yang Liu with Morgan Stanley.

(foreign language) Let me translate the question briefly. The first one is about the cloud platform. We see that -- we see very strong year-on-year growth, but Q-on-Q, it has been staying at around CNY 300 million for 3 quarters. Could management help us to understand more about the seasonality of this business and which growth year-on-year or Q-on-Q should be more indicative for the future?

And the second question is about non-IFRS gross margin, which declined year-on-year. Is it due to the cloud platform, has the low R&D capitalization or amortization expense or something else?

And the third question is operating cash flow. Because we see stable net loss and narrowing net loss margin, but the operating cash flow in the first quarter is weak. Is it due to some cash traction issue at the end of March because of Shanghai lockdown or anything else?

Thank you, Yang Liu. Luo will take your questions.

[Interpreted] On your cloud question, in Q1, we believe that Q-on-Q number will be a better metric because in the later half of next year, we see a lot of new business units. For example, Lufax started to use this product. And that means we experienced some increase from our stock and decrease in customers. And therefore, if you want to have a better look at the growth potential, Q-on-Q would be a better metric.

There are 2 factors contributing to low -- relatively low non-IFRS gross margin. The first is that with the launch of new products like core banking, we did experience lower gross margin in early stages. And secondly, due to the lockdown measures and travel restrictions, the implementation project has been delayed. And that means our revenue growth couldn't support the increase from our delivery costs.

On cash flow, overall, the operating cash flow remains at an average level but we did see higher amount of receivables at the end of Q1. The slight mismatch between cash flow and profit and loss is mainly due to mismatch in receivable collections due to COVID reasons. And we also see expansion of EV business in PAOB, and that has led to some cash outflow. At the end of Q1, our cash and cash equivalents amount to CNY 2.2 billion. And looking forward, our cash flow performance still match our long-term profit and loss expectations. In the future, we will continue to improve profitability, increase our revenue growth and be more disciplined with cost reduction, so as to achieve the narrowing of net loss. We will also prioritize our target of breaking even. And so far, we see that our cash is enough -- is sufficient to support us until we breakeven.

Thank you, Mr. Luo. That concludes the question-and-answer session. And now I will turn the call over to Danielle Gao for closing remarks.

Thank you, everyone, for joining the call today. If any questions, just feel free to contact our IR team. We appreciate your interest in following us and looking forward to speaking with you again. Thank you.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]