OneConnect Financial Technology Co Ltd (OCFT) 2022 Q3 法說會逐字稿

Hello, everyone, and welcome to the OCFT 2022 Q3 earnings release. My name is Emily, and I will be coordinating your call today. (Operator Instructions) I will now turn the call over to our host, Danielle Gao, Head of Investor Relations. Please go ahead.

Thank you. Hello, everyone, and welcome to our third quarter 2022 earnings conference call. Our financial and operating results were released earlier today and are currently available on our IR website. Today, you will hear from our Chairman and CEO, Mr. Shen Chongfeng, who will give opening remarks and Q3 business highlights. Afterwards, our CFO, Mr. Luo Yongtao, will offer a closer look into our financials. And then, in question and and-answer session, our management team will be available. We have our Head of Southeast Asia business, Ms. (inaudible) ; and Chief Executive of Hong Kong Virtual Bank, Mr. Michael Fei; and our Head of Strategy and Product, Ms. (inaudible).

In today's conference, our management team will make statements in Mandarin or in English. For those in Mandarin, a second translation will be provided. If any discrepancy, management statement in the original language will prevail, unless otherwise stated, growth rates of all the metrics refer to year-over-year growth versus the same period of last year and the currency is in RMB.

Before we start, let me quickly cover the safe harbor statement, as we will be making forward-looking statements, which will 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.

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

[Interpreted] Hello, everyone. I'm Shen Chongfeng. Thank you for taking the time to dial in OneConnect's 2022 Q3 earnings release.

Before I begin, I'd like to announce the personnel change first. During today's Board meeting, the Board approved Dr. Ye Wangchun's resignation as Executive Director and appointed Ms. Fu Xin, the Chief Operating Officer and Director of the Strategic Development Center of Ping An Group as a Non-Executive Director. The Board thanks and appreciate Dr. Ye's contribution to the company during his tenure as Executive Director.

International complexities, implications from COVID and macro uncertainties perpetuated into the third quarter. Despite these challenges, OneConnect team overcame difficulties, went all out and achieved solid performance in Q3. Revenue in the first 9 months, up by 13%, reached CNY 3.22 billion.

Macroeconomics and the pandemic continue to weigh on the growth of parts of our business, including some implementation projects and usage of volume-based products. In other words, we see declining usage in lending products and auto insurance ecosystem products.

Other than these products, we did note robust development from other solutions. For example, offerings from Gamma platform, especially AI customer services, maintained a strong growth momentum in the first half of 2022 in both customer number and revenue. Overseas business, which includes Ping An OneConnect Bank in Hong Kong registered a growth rate more than double last year's.

As an important initiative in our stage 2 strategy, OneConnect has continued product integration and upgrade by launching new offerings. In digital insurance, we released a digital management platform for life insurance agents and kicked off cooperation with a global top 50 insurance company, applying our products to its business in South Africa. As for digital banking, we have integrated retail and SME lending systems and built a middle platform based on a unified technology architecture. On top of that, we proactively adjusted our product portfolio by phasing out projects with heavy customization and low ROI as well as improving product standardization.

Over the short term, this is at the expense of some projects and the growth rate. But looking forward, these efforts will further cement OneConnect's competitiveness in our core products and generate valuable returns.

Next, I'll brief you on business development in this quarter. So please turn to Page 3 of our slide. This year, we are still at the second stage of our development that is broadening customer engagement where we focus on Ping An Group and financial institution customers, as well as integrated products and build Gamma platform.

Now we are at Page 4. We remain committed to one body two wings strategy in stage 2, which means we continue to focus on financial institution customers while expanding ecosystem and overseas business.

In Q3, total revenue reached CNY 1.07 billion, Premium Plus customers increased by 9 year-over-year to 163. Operation efficiency improved significantly. Margin of net profit attributable to shareholders narrowed markedly by 13 percentage points to negative 12.4%.

Next on Page 5. As one body two wings strategy takes root, OneConnect achieved greater coverage of financial institution customers in the first 3 quarters. Digital banking products, including digital lending, AI banker app deepened our engagement with Huaxia Bank, Bank of Ningbo, Bank of Suzhou and many other customers, enabling them in their digital infrastructure and accelerating application of home developed technology.

In digital insurance, we initiated a relationship with many insurers in the first 9 months Dajia Property and Casualty Insurance, Liberty Mutual, Taikang Insurance and Jintai Insurance to name just a few. These brand names demonstrate our growing penetration among insurance companies.

In terms of Gamma platform, upgraded hit products, including AI customer services continue to make new market breakthroughs, as you can see from projects with Bank of Guizhou, Bank of Beijing and Bank of Chongqing, et cetera.

Standardization of high gross margin product is the key to OneConnect's future as a business and service provider. As you can see on Page 6, AI customer services leveraging OneConnect's unique advantage of business plus technology and incorporating diverse financial scenarios and leading technologies now spans a wide range of functions, including smart customer service, smart loan application, smart marketing and a robust platform. Final -- basis, 1,600 AI services -- service scenarios, over 200 quality assurance models and over 3 million AI sales scripts underpinning the product, boosting AI adoption rate to as high at 94%.

By the end of September, third-party revenue growth in AI customer service doubled on a year-over-year basis. Premium Plus customers also expanded significantly. Its customers are also quite sticky. Net expansion rate for Premium Plus customers in the first three quarters exceeded over 100%.

Next, please go to Page 7. Overseas business remains a key initiative in our one body two wing strategy as we continue to strengthen international presence in Hong Kong and the Middle East.

Ping An OneConnect Bank is the first virtual bank in Hong Kong to focus on SME services. We are also the only one to use our alternate data for modeling, which means similar and more precise loan approvals for SMEs and won us recognition from Hong Kong MA and Hong Kong MC. PAOB is committed to digital financial inclusion. Account opening can be done online and within 1 day. Of the customers we serve, 30% are first-timer loan applicants. Revenue growth in 2021 ranked first among virtual banks in Hong Kong and revenue continue to show strong growth momentum in the first 9 months of 2022, increasing by twofold year-over-year.

PAOB also enjoyed great brand name in the industry, evidenced by awards from renowned financial news outlets, including Asiamoney, Euromoney and Hong Kong Economic Journal. The bank ranked 45th in the global top 100 digital-only banks ranking, top 1 in Hong Kong.

Our credit reference services agency in Hong Kong, Ping An OneConnect CRA, also went well, and we officially received the license for CRA business this week. The company is expected to launch business in 2023 to provide three types of products and services, namely traditional credit reference services, innovative credit reference services and cross-boundary services, for example, issuing cross-boundary credit reports. As always, we aim to deliver differentiated, diverse and accessible credit reference products and service models, contributing to the establishment and improvement of credit reference system in the Greater Bay Area.

At the same time, we have broadened our presence in the Middle East. On September, we announced our collaboration with Abu Dhabi Global Markets to empower the development of the SME financing platform. The platform aims to promote financial inclusion in the region, improve transparency and lower operating costs for SMEs. We officially launched our UAE subsidiary in Abu Dhabi Global Markets this October to provide digital services with leading technologies, such as cloud computing, artificial intelligence, to empower financial institutions in the Middle East and North Africa in their digital transformation journey.

Also, on Page 8. Additionally, we are also happy to announce that our brand new life insurance product made advances in the international market as well with the new digital and efficient all-in-one platform for life insurance agents, which spans a wide range of insurance services from digital adviser experience and sales service funds to customer insights. We formed a strategic partnership with a global top 50 insurer to empower the digital transformation of its life insurance agents in South Africa.

On Page 9, as I mentioned in the opening remarks, the future of OneConnect lies in product standardization. During the first 9 months, we continue to improve our products by standardizing functions and complete it over 60 updates. In digital banking, we integrated retail and SME lending systems and built a middle platform based on a unified technology architecture. Upgrades in Gamma platform includes data middle platform improvement and AI capability improvement in AI customer services. We are confident that standardized products will boost OneConnect's overall profitability.

Another part of our effort to execute this key initiative in stage 2 strategy, i.e., product integration and upgrade, is to proactively adjust our products -- our projects. We faced our projects with heavy customization and low ROI. As a result, we see improved ROI in Q3.

While COVID outbreak resurges across China, we are only 1 month away from the end of 2022. For OneConnect, the macro environment and pandemic have put business growth under pressure. However, this does not undermine our confidence in our future, which stems from recognition by the market and our customers, boosting product competitiveness and the growth in financials that our team has worked hard to deliver. We believe these external challenges are only temporary. As a young tech company, we will remain agile and remain committed to improving third-party revenue and becoming profitable.

Next, our CFO, Luo Yongtao, will give you a detailed update on our financials in Q3 and the first 9 months. Luo, please.

Okay. Thank you, Chongfeng. Good evening, everyone. Next, I will give you an update on our financial results in Q3.

Total revenue in third quarter reached CNY 1.07 billion and third-party revenue remained steady at CNY 0.35 billion. Premium Plus customers with revenue contribution of CNY 1 billion -- over CNY 1 million was up by 9 customers to 163. Net loss this quarter was CNY 0.13 billion with net profit margin at negative 12.4%, which improved significantly or 13 percentage points from negative 25.3% in Q3 2021.

Let's start it from the top line. Revenue remained stable at CNY 1.07 billion in the third quarter and increased by 13% to CNY 3.22 billion in the first 9 months of 2022. In Q3, the revenue increase was driven by operation support, implementation and others. However, this was offset by the revenue drop from business origination and risk management, resulting from pandemic curbs and our continuous phase out of low-value projects as a core initiative in our second stage strategy. I will give you more colors on revenue growth drivers later.

Revenue mix by customer type remains roughly same in this quarter compared to the same time period last year. Revenue from third-party customers reached to CNY 351 million, same as Q3 last year and accounted for 33% of total revenue. Due to COVID impact, revenue from business origination, auto insurance claim products and domestic implementation business shrank. Phaseout of low-value products also reduced on revenue. Other than the businesses mentioned above, we still achieved stable improvements.

Contributions from Lufax grew slightly by 5.2% from CNY 113 million to CNY 118 million, representing 11% of total revenue. Operating support business contributed most of the revenue growth. Revenue from Ping An Group reached CNY 599 million in the third quarter and made up 56% of total revenue. The overall contribution from Ping An Group remains steady. The usage volumes of some transaction-based products decreased, for example, P&C claim-related products and banking lending products. This was offset by customer service support business and new launched projects to meet the business requirements.

Moving to revenue mix by business type. Implementation revenue accounted for 19% of total revenue, reached CNY 202 million from CNY 189 million in the same time period last year, which was driven by the ongoing digital transformation in Ping An Group and our new overseas life insurance business expansion.

On the other hand, implementation revenue from domestic third-party customers dropped due to the pandemic travel restrictions and our continuous phase out of low-value projects with high customized requirements. Revenue from business origination was CNY 94 million compared to CNY 115 million for the same period in last year, primarily due to the decrease in loan volumes as a result of pandemic curbs and macroeconomy.

Revenue from risk management was CNY 105 million this quarter versus CNY 113 million for the same period last year, primarily due to the decreased usage volumes of P&C insurance claim-related products that are more susceptible to COVID control measures.

Revenue from operation support rose to CNY 294 million from CNY 280 million from -- for the same period in the prior year, primarily benefiting from increasing product usage charged by stock-based fees, especially various types of business for customer services.

Revenue from cloud services platform remained steady this quarter with revenue contribution of CNY 294 million slightly dropped from -- sorry, CNY 297 million slightly dropped from CNY 303 million in the same period last year. As mentioned in previous earnings release, our cloud services business has entered into a stock stage and the revenue will remain at a stable level, which is subject to actual usage volumes of our clients.

Third quarter's revenue is in line with the company's expectations. Both implementation and other revenue was up by 19.2% to CNY 78 million from CNY 65 million this quarter, accounted for 7% of total revenue. Such improvement was mainly driven by the robust growth of virtual bank business in Hong Kong as a key part to our strategy in the Great Bay Area and overseas. PAOB's revenue kept improving multiple times faster than our overall business.

Let's turn to the revenue mix by product type. Gamma platform, a strategic focus for innovation was the biggest chunk of our revenue, which accounted for 49% of total revenue in the third quarter. AI customer service, core banking system and other initiative businesses kept presenting remarkable growth.

Revenue growth from overseas insurance business contributed to the increase of digital insurance revenue with the production of 21%. Meanwhile, digital banking make up 28% of total revenue and PAOB accounted for 2%.

For the revenue mix by product type in the 9 months of 2022, digital banking, digital insurance Gamma platform and PAOB contributed 28%, 19%, 51% and 2% of total revenue respectively.

This quarter, we continue to commit to our stage 2 strategy where we focus on potential from Premium Plus customers. The total number of Premium Plus customers continued to grow this quarter by 9 customers to 163, with most of them being existing customers. The interest also testifies our success in deepening engagement with existing customers. We are happy to see that more and more Premium Plus customers are using multiple products from our different product lines.

Gross profit was CNY 375 million in the third quarter, and the gross margin of 35.1% remains about a flat level at the same period last year. On non-IFRS basis, gross margin was 38.4%, compared to 42.2% in the prior year. This was a mixed result caused by different factors.

On one hand, with product integration and upgrades being a key initiative in our stage 2, we continue to optimize our product strategy, improving ROI and product standardization and proactively based on projects requiring heavy customization. On the other hand, usage volume of products with relatively higher gross margin, such as P&C claim-related products and the loan products in risk management decreased due to the intense macro circumstances.

We are pleased to see that we are well on track to our breakeven target as we make prominent progress and loss reduction this quarter. First of all, our research and development expenses came to CNY 287 million from CNY 323 million. As a percentage of revenue, it amounted to 26.9% compared with 30.4% in prior year. We continue to implement our second stage strategy on product integration.

Our products on overall point of view are more and more mature gradually. At the same time, we commit to improve our development efficiency by optimizing our tailing structures. Looking forward, we will keep spending most resources on research and development to upgrade and develop products to strengthen our competitiveness in the market.

Sales and marketing expenses for the third quarter of 2022 decreased to CNY 94 million compared with CNY 131 million in the prior year. The percentage of revenue decreased to 8.8% from 12.3%. The improvement was benefited from enhanced sales capability and efficiencies. We managed to further reduce our total sales labor costs while remaining revenue growth. Meanwhile, telecommunication, marketing and travel-related expenses also decreased compared with the same period of 2021, partially due to the COVID control policy.

Regarding general and administrative expenses, they came to CNY 167 million from CNY 170 million in the same period last year. As a percentage of revenue, it decreased to 15.7% from 15.9%. Notwithstanding some one-off expense included, we managed to decrease general and administrative expenses by various stringent cost control measures. Benefited from all above, our net loss narrowed to CNY 133 million from CNY 270 million in the same period last year and the margin improved by 12.9 percentage points from negative 25.3% to 12.4%, continue to deliver double-digit improvements.

On this page, you can find the comparison of cost in the past 3 years and the first 9 months in 2022, which shows clearly the path towards breakeven by midterm. We will continue to implement higher ROI product requirements and phase out products, which are meeting our standards. We will also maintain stringent cost discipline to curb the expenditures. With all these measures, we are confident about breaking even with regard to our business plan.

I would like to reiterate the key focuses of OneConnect in 2022, third-party revenue growth and cost discipline towards path to profitability. Due to the current circumstances, we are still facing pressure on both total and third-party revenue growth. However, we do believe that the group will recover once the COVID control measures is, and the macro solution, revamp. We can also see the product integration and optimization will further improve our revenue growth and profit improvement. Lastly, we summarize key financial metrics in the third quarter and the first 9 months, as well as the adjustments in non-IFRS gross margin for your references. Thank you.

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

(Operator Instructions) Our first question today comes from Timothy Zhao with Goldman Sachs.

(foreign language) I have two questions. The first one is about industry. Can management share some color on how the management team looks at the IT spending of the financial industry, including Ping An and the third-party customers? And also in the bigger industry context, how should we look at the industry IT spending into next year and how that will impact our revenue growth?

And secondly, on the overseas business, I see that our overseas business has progressed in different business lines and in different regions. Could management share our strategy in terms of our expansion on a high level? And how should we think about revenue contribution for next year?

Thank you, Timothy. Chongfeng will take your first question, and Michael and Luo will take your second question. Chongfeng, please?

[Interpreted] So I'll answer your question about the development of financial institutions and the industry. The macro environment and the pandemic have put the business development of banks under pressure. So over the short term, some financial institutions may cut their IT investment to lower costs and improve efficiency.

But looking forward, over the mid- to longer term, we do see market demand from banks. So banks are under business pressure and need to boost their operating -- operational efficiency, mainly from risk management and operation support. And we see great digital transformation demand from the following areas.

So firstly, banks have demand in risk management capabilities from technology applications, digital operation, data security and the adoption of home developed technology. And these are also the key focuses of our R&D investment in digital banking and Gamma platform.

During economic downturns, medium- and small-sized banks are more in need of a head to toe digital transformation. And that means small- and medium-sized banks need business plus technology solutions.

We can hear you. Yes, we can hear you.

Yes. Okay. I'll take the question on the Southeast Asia or the overseas question, right? So I think Southeast Asia, we have positioned as a region that has $1 billion and $2 billion growth potential. And in Southeast, in the next 2 years, with the economy entering into potentially recession, actually, you see Southeast Asia as the one bright spot that has the highest GDP growth or that region having more than 5% GDP growth. So we continue to be very bullish about Southeast Asian growth.

Today, we are servicing more than 100 customers and over 20 countries. The revenue ticket size is very positive because the sales is in U.S. dollars and the ability to price the same solution in U.S. dollars, it brings us much more profit.

And then going into 2023, in fact, in Q3 this year, we started two collaborations. One is the Pismo collaboration so that we combine what is good from the East with what is good on the West in terms of (inaudible) banking. So in this collaboration, we started launch in Q3, we are foreseeing good results coming potentially next year. And in Q3, we also launched the ADGM entity. We actually had the entity earlier on. It's just that we did the product and the actual entity launch with the (inaudible) event, which is the fintech event in Abu Dhabi last quarter. So at this moment, I think we're seeing good enough growth. Q3 growth is very good for us. We doubled Q3 compared to year-on-year.

For percentage of revenue, I remember, we started off initially in the earlier year, single digit to the revenue. And then we were in the early teens. As of this quarter, we are about 20% of external revenue of OneConnect, and we continue, we'll see the growth -- continue the growth.

Let me talk about the Hong Kong business. I think the overseas business for OneConnect, we have two parts. One is the Southeast Asia, which Shen just described and then is the Hong Kong. In Hong Kong, we actually have three different segments. One is a technology services for financial institutions in Hong Kong. I think that's very similar to -- I mean just to describe the market, our competitive edge, et cetera. So I will not repeat that.

The other two supplements of our business, one is virtual bank. The other is the private (inaudible) the businesses. We have two very valuable license in Hong Kong. So for PAOB, I think Mr. Chongfeng has already introduced in his main presentation that we continue to be one of the best-performing virtual banks among the eighth. I think the reason for that was that, first of all, we have a very different positioning. We are different from the rest of (inaudible). We serve -- we are dedicated to serve (inaudible).

Now the second advantage that we had (inaudible) So we had a lot of the technology. We had a lot of lending that we (inaudible) borrow from OC in Mainland and implement in the Hong Kong market.

I think as a next step, we will continue to focus on SME. We will continue to be using leading technology to help the SMEs in the Hong Kong market and the (inaudible) to a broader segment on supply chain around the GBA area. We will partner with more and more partnerships to using alternative data to sell the SMEs.

If you were in the entire week, last week, you will notice that during the Hong Kong (inaudible) formal launch of CDI, commercial data interchange, PAOB is actually one of the first. Actually, we are the largest contributor of CDI usage in Hong Kong. So we expect to continue to move on because we continue to grow very rapidly in our revenue and continue to improve our (inaudible).

And the second license, valuable license we have is a (inaudible) reference. We are 1 of the 3 companies that got the license earlier. We formally received the license early this week from Hong Kong Bank Association. So we're starting to do the initial data loading, which means we will get all the data from the various banks, and we estimate to launch our formal services in the second half next year.

I think this is also very -- we were very optimistic about this one because I think given the more and more closer connection between -- between Mainland China and Hong Kong, for OneConnect, I think that's one of the Mainland-based companies that has a license in Hong Kong. We are uniquely positioned to leverage our strong technology leadership and our experience on Mainland and to try to connect the credit information in Mainland China, as well as Hong Kong so that we can provide more holistic credit reference report to the bank.

And also, I think our technology advantage also will allow us not just providing a report, but we will also be able to provide risk services -- risk management services, (inaudible) services, et cetera, to the banks or the financial companies using our report. I think as a whole, we are very, very optimistic about the growth of our business in Hong Kong.

Our next question comes from (inaudible) with Orient Securities.

(foreign language) I will also do the translation. And the first one is a quick finance question about the cash and what's our current cash position. And second one is after (inaudible), what was the biggest change during the last 1 year?

Yes. Thank you, [Tian] And our CFO, Luo Yongtao, will take your first question.

[Interpreted] I will answer your question about our cash position. So as of the end of September, we now have around CNY 23.7 billion of cash, around CNY 420 million is at our Virtual Bank PAOB and the rest is with our other entities. And we see significant improvement in our cash control measures.

Firstly, we have narrowed our losses remarkably, and this has benefited our cash position. Secondly, we also increased our efforts in the collection of account receivables. As a result, we see decreased days of account receivables and short-term account age.

At the same time, our other measures in cash management have all paid off. So with sufficient cash position and sound business operation, we are confident that this cash will be enough to sustain us until midterm, that is when we reach breakeven.

[Interpreted] So I'll answer your second question about what has changed over the past year. I have three main messages. The first is that our products are more focused. The second is that we have broadened engagement with our customers. The third change is that we see lowered costs and improved efficiency. As a result, we see significant improvement in our operational efficiency.

Looking forward, we remain committed to our second stage strategy that is broadening customer engagement and achieve product standardization, sales standardization, as well as delivery standardization, so that OneConnect will remain committed to our target of business -- achieving business plus technology.

Those are all the questions we have time for today. So I will hand back to the management team for any concluding remarks.

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

Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.

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