OneConnect Financial Technology Co Ltd (OCFT) 2023 Q3 法說會逐字稿

Thank you, operator. Hello, everyone, and welcome to our 2023 third-quarter earnings conference call. Our financial and operating results are released earlier today and currently available on our IR website.

Today, you will hear from our Chairman and CEO, Mr. Shen Chongfeng, who will you give you opening remarks and business highlights. Afterwards, our CFO, Mr. Luo Yongtao, will brief you our latest corporate developments and offer a closer look into our financials. And then in question-and-answer session, our management team will be available to you. We have our CTO, Mr. Li Jie; and Head of Strategy, Corporate Planning, and Product Management, Ms. Jessie Shen.

In today's conference, our management team will make statements in Mandarin or in English. For those in Mandarin, a consecutive translation will be provided. In case of any discrepancy between the Mandarin version and the English version, our statement in the original language shall prevail.

Let me quickly cover the Safe Harbor statement before we start. 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 will 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. Mr. Shen, please.

(interpreted) Hello, everyone. I'm Chongfeng Shen. Thank you for taking your time to dial in OneConnect third-quarter earnings release. On behalf of OneConnect, I'd like to welcome investors, analysts, and friends from media to join this call. It's a great pleasure for me to share with you all what we have achieved this quarter.

A couple of days ago, the (inaudible) financial world conference has highlighted the importance of technology innovation in finance, green finance, financial inclusion, pension finance, and digital finance. And as an important part of digital economy, digital finance is the pillar of its development.

We witnessed new excitement for AI called by ChatGPT in 2023. This new round of the disruptive technology with AI as its center has opened up greater possibilities for digital transformation in the financial industry. According to a research paper by McKinsey, generative AI alone can generate another $200 billion to $340 billion for the banking industry, which represents 2.8% to 2.7% of total industry revenue. Together with a new round of industry structure upgrade in China, steady economic recovery, and a transition from previous growth drivers to new ones, we are very excited about demands in digital finance and our performance ahead.

Our strong growth momentum in the first half of this year continued. We achieved solid performance in the third quarter. Net loss attributable to shareholders in the first nine months narrowed by [RMB414] million or 60% compared with the same period last year. Gross margin improved by 0.9 percentage points year over year to 36.1%. These metrics mean we are well on track to becoming profitable by medium term.

Now please go to page number 3. Centered around our business philosophy of value, win-win cooperation, and quality development, we achieved significant progress in three core initiatives, namely strengthening customer expansion, focusing on product upgrade, as well as deepening loss reduction and improving efficiency. At this stage, we are also expediting efforts to exporting our group products and upgrade our own products with more resources centered around high-value products. And at the same time, the company has also fine-tuned ROI management of projects and cost management, which we have put us closer to medium-term strategic target of breaking even and becoming profitable.

Next on page 4. In terms of product, upgrades continued, further contributing to quality operation. To enhance value creation and proactively adjust business structure, OneConnect has been up with phasing of high customization, low gross margin, and low-value product and strengthen resource management of products to be phased out.

We have also shifted our focus on upgrading and growing standardized products and services and pivoted towards chargeable volume services. OneConnect has also adjusted R&D spending, including pooling resources on core products and gradually increasing contribution from new products.

Next on page 5. 2023 remains a key year of Stage II strategy, that is broadening customer engagement. During this stage, we are committed to one body, two wings, where we focus on financial institutions or expanding ecosystem and overseas.

Next on page 6. In digital banking, we landed a new small management contract with a national joint -- with a joint national bank this quarter. The contract value exceeded over RMB10 million.

We further expanded digital transformation into accounting and financial operations management scenarios. With portfolio strategy, we offering loan simulations to select multiple decisive metrics, which are then used to [hide] asset and liability management and help banks to transform the experience driven to drift to digitally driven. It also enables banks to shorten simulations of budget scenarios from one week to 30 minute, and we place monthly metric reviews with daily reviews.

Additionally, we also landed an economic capital project in a large national commercial bank which represents the latest use case of measures for the administration of capital pr commercial banks. Our product aims to achieve transformation to capital-efficient development. With risk-adjusted returns on capital as the core standard for capital allocations, we provide measurement tools for banks and their branches, building a flagship case for the application value of economic capital management system.

Next on page 7. In digital insurance, we have made significant R&D investment in new solutions. To address pain points of small and medium-sized auto insurers, namely risk assessment, cost management, and risk management, we are prepared to launch an end-to-end solution covering claim settlement, flat underwriting plus service, which stems from Ping An Group experiences in auto insurance operations in over three decades. The beta version is expected to come late this year, and the official 1.0 version will be unveiled in the second quarter of 2024.

Next on page 8. For Gamma platform, we further integrated AI into key nodes in our operations. For instance, our AI interview robot incorporates AI technologies such as smart conversations, digital personality, and visualize the risk management when reviewing retail loan applications. This solution improves automatic loan approvals by over 30%. In our wealth management services, our AI robot boost customer conversion by 40% with the help of AI technologies like knowledge graph and smart recommendations as well as scenarios like preset scripts and cartons templates.

Next on page 9. With more new landmark projects in this quarter, we also have further expanded cooperation into two wings, namely ecosystem and overseas. We landed a DaaS projects in public utilities worth over RMB10 million taking up operation and maintenance as well as system construction in this area.

On top of that, we kicked off a cooperation with a top national bank in asset liability management with a contract worth also over RMB10 million. OneConnect offering will help the bank improve their funds transfer pricing mechanism as well as enhance their business data pricing mechanism and analysis visualization.

We are also proud to say that Hong Kong Stock Exchange brand-new IPO settlement platform, FINI, to which OneConnect provide their technology and support, is expected to be officially launched soon. With the new platform, the IPO turnaround time from pricing to trading will be shortened from T plus 5 to T plus 2, which marks another important milestone for Hong Kong's capital market.

Next on page 10. Our hard work has brought in multiple awards from third party and [renowned in their implications]. We won the first prize of Science and Technology Progress of Guangdong Province in 2022 and the made it into IDC Global FinTech Top 100 list for a number of consecutive years. Ping An financial cloud received award from China Academy of Information and Communications Technology.

This September and October, we hosted retail -- banking digital transformation summit and a remote banking development summit in Shenzhen and Shanghai, respectively. In our exchanges with many executives from banks, we noted firsthand that the industry is under operation and management pressure as a result of narrowing interest rate margin and increasing NPL ratio.

Commercial banks, especially medium and small-size city and rural commercial banks are in urgent need of leveraging third-party capabilities, enhancing operation management and improving digitalization. That means broader market and broader possibilities for top fintech companies in this industry.

There are still two months to go this year. As the Chinese economy gradually warms up, we will continue to improve operating strategy again as business structure adjustment and product upgrade maintain stable financial performance and make steady progress towards medium-term targets. Additionally, we will focus on improving revenue from third party, seek opportunity to expand international cooperation, capitalizing on digital transformation along the Belt and Road Initiative in regions such as Southeast Asia and Middle East. Thank you.

Next, I will hand over to Luo Yongtao t to brief you on a recent Board resolution and our financial performance in this quarter and the first nine months of this year.

Thank you. Good morning, everyone. I'm pleased to share with you some updates about our latest corporate development. Yesterday, we entered into a share purchase agreement with Lufax and PAOB. OneConnect agreed to sell, and the Lufax agreed to acquire 100% share of PAOB at a consideration of HKD933 million in cash.

Upon closing, OneConnect will cease to hold any interest in PAOB and PAOB will cease to be a subsidiary of OneConnect and will no longer be consolidated into the financial statement of OneConnect. PAOB was established in December 2018. It obtained one of the eight virtual banking licenses in Hong Kong in May 2019 and opened the business in September 2020.

PAOB was the first devoted bank to provide flexible and efficient banking services with a focus on SMEs, and it was the first devoted bank to participate in SME financing guarantee scheme launched by the Hong Kong Mortgage Corporation. In terms of credit assessments PAOB will adopted automated data to support its credit decisions, allowing it to better understand SMEs financing needs and to perform high-quality credit risk assessment.

As of the first half of 2023, the revenue of PAOB was HKD75 million or 3.6% of OneConnect total revenue, and the net loss was about HKD87 million. The purchaser, Lufax is a leading financial services network with strong capital base, which product lines and a mature risk control and technological capabilities. It offers financing products designed principally to address the needs of small business owners.

Lufax has established relationships with financial institutions in China as funding and credit enhancement partners to provide general unsecured and secured loans. And there is core retail credit and enablement business model. Lufax is also listed on New York Stock Exchange and the Hong Kong Stock Exchange.

OneConnect is a technology-as-a-service provider for the financial services industry in China with an expanding international presence. Taking into account the current business strategy of the group, the directors and the management team believe that the disposal represents a good opportunity for OneConnect to focus more on technology driven products and services and allow us to better deploy appropriate resources.

Upon completion of the disposal, OneConnect will continue to focus our Stage II Strategy and to enhance existing technology solutions and the products. As I just mentioned, upon closing, the disposal will bring us HKD933 million in cash. The company currently intends to apply the proceeds from the disposal as general working capital to improve the core business [operators] of OneConnect, and it will focus on our technology capabilities and products and facilitates the long-term business development.

At this time, we believe that the store financial and the technology capabilities from Lufax will help PAOB to achieve [the tenable] and healthy progress going forward. The Board and management team undertakes strategic review of our business from time to time with a view to maximizing returns to the shareholders.

Next, let go through the financial results of Q3 2023. We have achieved a solid third quarter. In Q3, we have made substantial progress in [cost] reductions, which is consistent with our strategic goal to achieve midterm profitability. Although we have experienced a revenue decline in the past few months, it is during these times that we have the opportunity to showcase our resilience and ability to adapt. We'll be exploring new opportunities, assessing our current processes, and making necessary adjustments to ensure that we can regain growth momentum in the near future.

In the third quarter of 2023, we delivered revenue of RMB844 million, decreased by 21.1% compared to the same period last year, primarily due to the decline in transaction based and [support] revenue. Revenue generated from third-party customers decreased by 12.6% to RMB307 million in the third quarter.

The number of premium plus customers decreased year over year to 154 from 163 for the same period in 2022, primarily caused by fewer customers in digital banking sector due to the slower-than-expected banking IT spending. We are thrilled to see net loss attributable to shareholders was RMB91 million and the corresponding net loss ratio to shareholders improved by 1.6 percentage points on a year-over-year basis to negative 10.8%.

Now let's turn to our revenue mix. In the third quarter, our third-party revenue decreased by 12.6% to RMB37 million compared to Q3 last year, contributing 36.4% of total revenue in Q3. Third-party revenue growth remains the key focus of our second stage of strategy. We will continue to seek opportunities that align with our growth objectives, fueling to further expansion of our third-party revenue streams.

In the third quarter, revenue from Lufax decreased 48.5% to RMB61 million, and it contributed 7.2% of our total revenue. The revenue decline from Lufax was mainly due to Lufax business operations optimization resulting in lower demands of business origination and risk management services.

Revenue from Ping An Group decreased 20.6% to RMB476 million and contributed 56.4% of our total revenue. Revenue decline from Ping An Group was primarily due to a decline in transaction volume such as operation support and risk management products. The services provided to Ping An Group of core technology solutions, which have been deeply embedded into Ping An Group's daily operations. Looking ahead, we will continue to fully support Ping An Group's business reforms and look for new collaborations.

In the first nine months of the year, revenue from third-party customers decreased 8.9%, revenue from Lufax decreased 42.1%, and revenue from Ping An Group dropped by 13% for the corresponding period in 2022.

Moving on to revenue mix by business type, let's take a look at our Q3 result first. Implementation revenue decreased by 13.4% on a year-over-year basis to RMB175 million, mainly due to the lower revenue contribution from new customers as financial institutions recovering from the pandemic still takes time. Revenue from business origination services decreased by 17.9% year over year to RMB27 million, primarily due to the decline in transaction volume and our proactive actions of taking out low-value products in the digital banking sector.

Revenue from risk management services decreased by 26.3% year-over-year to RMB77 million, mainly due to reduced transaction volume in banking loan solutions because of slower-than-expected banking activities in the third quarter. Revenue from operation support services decreased by 33.5% on a year-over-year basis to RMB195 million, which was primarily caused by reduced demand from auto insurance customers and the banking customers.

Revenue from cloud services platform was RMB297 million. It stayed stable on a year-over-year basis in the third quarter. Revenue from post-implementation support and other services decreased by 30.3% year-over-year to RMB34 million in the third quarter. The decline was primarily due to a lower demand for auto ecosystem services. Revenue from PAOB virtual banking business in Hong Kong increased by 30.4% to RMB37 million as compared to the third quarter last year.

If we look at the first nine months of 2023, implementation revenue increased 13.5%. Revenue from business origination dropped 65.4%. Risk management decreased 25%. Revenue from operation support declined 23%. Cloud services platform revenue decreased 5.2%. Revenue from post-implementation support and other services dropped 32.6% and the PAOB increased 39.6%.

As you can see, we have been diligent in identifying and improving underperforming areas of our business and a focus on enhancing revenue structure. We will remain committed to increasing our product mix and adopting a stable and dependable stock-based [chosen mobile].

Let's turn to revenue mix by product sectors. Gamma platform sector, the focus of product innovation in recent years contributed the biggest chunk of our revenue, declined slightly of 2.4% in the third quarter of 2023 to RMB457 million and accounted for 54.1% of total revenue. The decline was mainly caused by reduced transaction volume of our open platform products.

Digital banking sector, which accounted for 23.9% of total revenue, reduced by 41.4% on a year-over-year basis to RMB201 million. And it was mainly caused by reduction in transaction volume of our business origination services and risk management services, which were related to our initiatives to [fit-outs] lower-value products and the impact from the lower-than-expected banking activities.

Digital insurance sector, which accounted for 17.6% of total revenue, decreased by 35.2% to GBP149 million in the third quarter of 2023, primarily due to reduced demand in our ecosystem services. In each sector, we phased out products with low margins, products with low technology value added, as well as those with limited potential for growth. In addition, [virtual] banking sector, as I just mentioned, accounting for 44.4% of total revenue.

Customer numbers in the third quarter of 2023, the number of premium plus customers decreased to 154 as compared to 163 from the same period of last year, primarily due to fewer customers in digital banking sector. We believe as we continue to advance our initiatives, we expect our customer base to be back and further expand (technical difficulty) more premium plus customers who will use our products and services.

Now let's take a look at the gross margin. We are very glad to see our gross profit reached to RMB295 million in the third quarter of 2023. Gross margin remains flat at 35%. And non-IFRS basis, the gross margin increased by 1 percentage point to 39.4%. In the first nine months of this year, our gross margin improved by 0.9 percentage points to 36.1%. And non-IFRS gross margin increased by 0.6 percentage points to 39.7%.

In the first three quarters of 2023, the continued efforts in product integration, standardization, and delivery efficiency improvements, together with execution on quality growth, helped improve our gross margin. We will stick to that strategy and the continued endeavor of achieving profitability.

Moving on to expenses and net loss attributable to shareholders, you can see that we are well on track to our mid-term breakeven target. First of all, our research and development expenses came down 19.9% to RMB230 million from RMB287 million in the same period of last year. As a percentage of ratio, it is slightly improved to 27.3% due to the reduction of total assets.

In the third quarter, our continued investment in technological innovation and organizational capabilities remains unchanged as our products were more upgraded and integrated. We've further improved our product delivery efficiency. Looking ahead, we will keep investing in research and development at a more measurable and reasonable pace to enhance our product competitiveness in the market.

Our sales and marketing expenses for Q3 decreased 18.3% to RMB73 million (sic - see slide 22, " RMB77 million" ) compared with RMB94 million in the third quarter of 2022. The improvement in sales and marketing expenses mainly benefited from our continued salesforce recruiting efforts and the decrease in marketing and advertising activities.

Our general and administrative expenses decreased 44% to RMB94 million from RMB167 million in the prior year. As a percentage of revenue, it decreased to 11.1% from 15.7%. The decline in general and administrative expenses was primarily due to stringent cost control measures and reduced labor costs.

It is worth mentioning again that under a challenging business environment, our net loss attributable to shareholders improved substantially to negative RMB91 million from negative RMB133 million in the same period last year. And the corresponding net margin to shareholders improved 1.6 percentage points to negative 10.8%. This achievement reflects our consistent commitment to enhancing our financial health and demonstrates the effectiveness of our GAAP actions on the journey towards profitability.

The next page demonstrates the trend of our net margin improvements to shareholders in the past few years. From this page, you can see a clear trajectory of our path to profitability over the years. Our first nine months of this year results continue to reflect that the effects of our disciplined execution of cost control, accompanied by improved operational efficiency, marking another milestone in the path to breakeven. We will continue our product integration efforts and strive to improve operating efficiency and business margins.

Looking ahead to the rest of the year, although we continue to see a degree of unpredictability at the macro level, our focus remains on improving third-party revenue. We will continue to enhance gross profit margin, focus on cost control, and operational efficiency improvement to stay well in check to the objective of profitability.

Next page, we list the key financial metrics of third quarter of 2023. Firstly, we summarized adjustments in [advanced gross modules for rebates]. Thank you.

Thank you, Mr. Luo. We are ready for questions. Please open the line.

(Operator Instructions) Lydia Lin, Morgan Stanley.

(spoken in foreign language) My question is about the Board management changes in Ping An level and are there any new business updates or operational priority changes in OneConnect, our business, that we have observed?

(spoken in foreign language) And the second question is all these big projects that we have signed up in the quarter this year, when can we expect them to be recognized as our revenue?

(spoken in foreign language) Thank you.

(interpreted) The Board conduct strategy you reviewed on the company's business from time to time and OC has established solid strategy planning and is very well organized. We have found very professional and good replacements for retiring directors. So we are confident that the current management team will continue to achieve quality development. And for the future, our focus will be on the development of quality products as well as to enhance our operation efficiency.

The other ones to your team earlier, could you (inaudible)

(spoken in foreign language)

Okay. Thank you very much for the second question. (inaudible)

(interpreted) For several major projects that we landed this year, we expect that this project will that from 2023 to 2024 and for this year, revenue will come in for some of this project, and based on the milestones that we can recognize, we believe that as more revenue streams will come in steadily next year.

Okay. Thank you.

(inaudible), (inaudible).

(spoken in foreign language)

Thank you for your question and your question will be taken by Mr. Jessie Shen.

(interpreted) As I've mentioned in the opening remark, the essential financial work conference has highlighted the importance of technology innovation in finance, as what green finance and digital finance. So for a small- and medium-sized financial institutions, especially rural and city, commercial banks, their main focus will be about to better serve and the real economy and to be more compliant with the regulatory required requirement.

So their target of better serving financial and (inaudible) economy to be more compliant with reservation as well as the new trend in (technical difficulty) operating margin and an increase in NPL ratio (technical difficulty)

So the implications on small- and medium-sized institutions is that there will be urgent need to enhance their digital capabilities, both in their everyday businesses as well as in their internal operations.

For OneConnect, our offering, including digital transformation in retail banking, credit management, as well as asset liability management, additionally our product in Gamma platform , will put us in a good position to position to empower these banks.

And these are -- dispersed are testament to our hard work in focusing on products and medium and small sized institutions. And therefore, we are very confident to -- about our development in the following years.

Thank you.

(Operator Instructions) [Alan Quan], [TT Group].

(spoken in foreign language) Thanks, management, for giving me an opportunity to ask the question. I just have a quick follow-up on the transaction announced today. Can management share a little bit more color on the rationale behind the divestment of PAOB to Lufax and wondering if management have any plan on -- shareholder return plans regarding the proceeds raised from the divestment? Thank you.

Thank you for your questions. Your first question will be taken by Mr. Shen, and the second one will be taken by Mr. Lou.

(interpreted) PAOB has become the virtual bank for the (inaudible) and for SME financial services in the Greater Bay Area. Its strong performance showcases OneConnect tech capabilities. When we applied for [PB] license in Hong Kong back in 2019, we wanted a use case for our end-to-end performance of platform solution to better serve prospective financial institution customers in Hong Kong and overseas and to capitalize on increasing demand for digitalization from financial institutions.

OneConnect is the technology service provider for financial institutions in China. We conduct strategy reviews on our businesses from time to time to be more focused with our businesses and to maximize returns for our shareholders. Given our current business strategy, the company believes the disposal is a good opportunity for us to focus more on technology-driven products as well as services. They are less cash demanding and allocate more resources to products and services to technology products and services. After the disposal, OneConnect will continue to pivot to existing technology offerings.

(interpreted) The proceeds from this disposal will be used as working capital to improve our cash position and operation. As of September 30, cash, not including cash from PAOB amounts to [RMB1.79 billion] in OC. That means we have sufficient funding for a long-term development. And with this disposal, we believe that this will help us improve sustainable and healthy development of our business.

Under our current strategy, the proceeds will be used to focus on developing technology products and capabilities. And these were fast with our long-term healthy end state and (technical difficulty) .

Thank you very much. I would like now to hand over back to Rick for any closing remarks. Thank you.

Okay. Thank you, operator. Thank you, everyone, for joining the call today. If any questions, feel free to contact our IR team, and we appreciate your interest in following us and look forward to speaking with you soon. Thanks.

This concludes today's call and thank you for joining. You may now disconnect your lines.