OneConnect Financial Technology Co Ltd (OCFT) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to OneConnect Third Quarter 2021 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, Miss.

Thank you very much. Hello, everyone, and welcome to our third quarter 2021 earnings conference call.

Our quarterly financial and operating results were released earlier today and are currently available on our IR website. Today you will hear from our Chairman, Ye Wangchun, who will start the call with updates of key achievements. Afterwards, our CFO, Mr. Luo Yongtao, will offer a closer look into our financials. And then our Board Secretary and Head of Commercial Banking, Mr. Michael Fei, will share our business highlights.

Before we continue, I would like to refer you to our safe harbor statements in our early press release as we will be making forward-looking statements, which involves 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. A discussion of the limitation of non-IFRS measures and a reconciliation to IFRS measures is included in earnings press release.

With that, I'm now pleased to pass the call to our Chairman, Mr. Ye. [Ye dong] please.

[Interpreted] Hello, everyone. Thank you for joining our earnings call. We are happy to share with you OneConnect's solid performance in the third quarter, where we were committed to executing stage 2 strategy unveiled on our open date this September, by continuously deepening customer focus, improving product integration, increasing financial institution customers' penetration while developing ecosystem and expanding overseas.

Revenue maintained steady growth in Q3, up by 20.8% year-over-year. Thanks to our strategy upgrade of deepening customer focus, which began earlier this year. We are happy to note that third-party revenue has shown very early but encouraging signs in this quarter at 16.1%. Third-party revenue growth rate is gradually starting to pick up, achieving the fastest growth in the past 5 quarters. Strategy upgrade will take some time, but as third-party revenue growth started to rebound, we expect that this momentum will continue.

The third quarter also saw healthy growth momentum in third-party customer base. The number of premium customers increased by 29.5% year-over-year to 601, already more premium customers than 2020 full year. Again, thanks to valuable customer focus, we are glad to report that premium plus customer base grew by 24% year-over-year to 150, almost the total number in 2020. Encouraging signs in third-party customer growth demonstrates the market's and customers' recognition of competitiveness of OneConnect products. More reasons for us to believe that pivoting to customer focus will bring long-term growth momentum to OneConnect.

Product integration also made some progress in this quarter. Gamma [Sync Cloud] was recognized by the most senior cybersecurity regulator in China, satisfying all cloud computing safety evaluation requirements jointly issued by 4 ministries. Sync Cloud has been certified as trusted cloud, a testament to its leading [continuous] service platform capability in China.

In Q3, OneConnect continued to focus on financial institution customers plus ecosystems and overseas, expanding government and regulator ecosystems and serving in the Southeast Asia and the Greater Bay Area. The smart financial service platform we developed for Hainan Financial Bureau was successfully launched this September. By combining cross-border trade scenario, the platform helps make financing easier and less expensive.

This quarter, a new member, Mr. Shen Chongfeng, joined us as our new CEO. Mr. Shen has rich experience in business software, cloud and business management. He has worked in Kingdee China for over 20 years. Under his leadership as the President, Kingdee China accelerated its business transformation to providing cloud services and [such] and achieved substantial growth in cloud business and market value. We look forward to Mr. Shen bringing his experience and expertise to further strengthen our technology capability, help us achieve our growth strategies in the next 5 years and better serve financial institutions in their digital transformation with our technologies and solutions. Since joining OneConnect, Ms. Shen has immediately started to visit customers and get closely involved in business development. Due to a scheduling conflict, he won't be joining us today. We look forward to his presence in the next earnings call.

To sum up, with OneConnect's sound performance in the third quarter and Mr. Shen serving us as our new CEO, we're confident to deliver our revenue growth guidance given in the second quarter and narrow net loss ratio by double-digit percentage points. Thank you.

Thank you, Chairman Ye. Next, CFO, Luo Yongtao will go through the financial results in more detail. [Luo, go], please.

Okay. Thank you, [Danielle]. Good morning, everyone. As Chairman Ye just mentioned, OneConnect achieved a solid result in the third quarter. Third party revenue, premium plus customers and net loss ratio improvement were the 3 highlights of this quarter. The third-party revenue for Q3 was CNY 351 million, 16.1% higher than the third quarter last year, which was showcasing the upward trend of the third-party revenue since Q3 2020. The number of premium plus customers reached 150 at the end of Q3, which was 24% more than the same time last year. The ratio of net loss to revenue kept narrowing down to 25.3%. It was 2.3 percentage points lower than the third quarter of 2020.

Okay. Starting from the top line. Revenue increased by 20.8% year-over-year to CNY 1,065 million in the third quarter. As we mentioned on opening day, we would be experiencing a short-term growth challenge when we push forward the progress of Strategy 2.0. And the result of the third quarter was a solid achievement. The revenue for the first 9 months increased by 27.5% to CNY 2,852 million over the same period last year.

By customer type. Revenue from Ping An Group rose 22.4% to CNY 601 million, mainly benefiting from the increase of cloud services. The demand for risk management solutions were also relatively strong. Ping An Group accounted for 56% of total revenue. At Lufax, revenue went up by 27.8%, to CNY 113 million, which was 11% of total revenue. From this quarter, OneConnect has provided cloud services platform to Lufax as well and started generating revenue from here. Third-party customers posted revenue growth of 16.1% to CNY 351 million and accounted for 33% of the total.

We saw revenue growth of implementation, which means acquiring more new customers. The demand for end-to-end auto insurance claim solutions was strong as well. Nevertheless, operations support continued to have a difficult quarter with the revenue drop.

It is encouraging seeing early signs of third-party revenue is starting to gain execution traction. According to our midterm target released on open day, we are aiming to have more than 50% from third-party revenue in 3 years. Accelerating third-party revenue growth will be our high priority. We have made good progress in upgrading corporate strategy from 1.0 to 2.0 and further enhanced our sales management and the customer outreach with more emphasis on premium plus customers. Michael will talk about it in more details later.

By business type. The cloud services platform was still the main driver in the third quarter. It contributed CNY 303 million in revenue or 28% of total. This quarter, the cloud services platform became the biggest contributor to the total revenue. Launched more than a year ago, this business allows us to move from application level to infrastructure level, strengthening our revenue resilience and connections with our existing customers. It is also one of the most important services of integrated technology infrastructure solution in our new strategy. Risk management also performed well in the third quarter. Revenue grew by 18% to CNY 113 million, led by fast claim solutions for auto insurance and risk analytics for banking, both on the retail and the commercial side.

The diversity of our business is a strong anchor. The growth in cloud services platform and risk management more than offset the temporary [stream] experienced in other business types. In terms of size, operations support was the second largest at 26% of total revenue. Revenue in operation support however fell 11% year-over-year to CNY 280 million. Implementation revenue also posted a decline year-over-year by 13% to CNY 189 million. The drop in business origination also continued. Revenue there fell by 12% to 115 million. As you can see on Page 9, overall revenue growth is supported by a diversified solution suite. The left-hand side is revenue mix by business type, is well-balanced and pretty stable from quarter-to-quarter in 2021. The balanced business portfolio helps us strengthen our resilience through economic cycle and partnerships with customers.

As we introduced on open day, we will combine and optimize individual small products or modules into 4 integrated products, digital retail banking, digital commercial banking, digital insurance and Gamma Platform. Gamma Platform, which includes cloud services platform, core systems, digital management and open platform is the technology infrastructure, supporting other 3 business products. It recorded CNY 543 million revenue and accounted for 51% of the total. Both digital retail banking and digital insurance contributed 18% of total revenue, respectively. The percentage contribution went down a bit, mainly due to the increase of Gamma Platform. The revenue of digital commercial banking accounted for 12% for the third quarter, and the ratio to the total has been relatively stable, with the growth rate catching up with the total revenue.

Moving to the gross margin. Year-over-year the metric decreased from 42.7% to 35.5%, reflecting the changes in mix of products. Some of our new products in the early stage do tend to have lower profitability. But if we look at quarter-on-quarter basis, metric was largely stable, and the third-party -- third quarter results was 1.4 percentage points higher than overall level for the last 3 quarters. We're expecting to see the gradual improvements through standardizing, upgrading new products and phase out low margin products.

Next, I would like to discuss operating expenses. The 3 main expense items all reported a drop in revenue ratio. Let's look at them one by one. Research and development expenses rose 9% to CNY 323 million as we continue to invest in innovation and new solutions, such as cloud services platform and other Gamma platform products. Even though some products are a bit more mature, like in digital retail banking, commercial banking and insurance, upgrade and enhancements are also called for. Yet as a percentage of revenue, the research and development expenses ratio was lower year-over-year from 33.5% to 30.4%. It is still relatively high compared to the market level. We keep investing significant resources in research and development to support our existing product offerings and to incubate new initiatives to enable us to continue to maintain our leading competition position.

In terms of sales and marketing, we spent less in the quarter. Expenses fell 15% year-over-year to CNY 131 million. As a percentage of revenue, the ratio went down even more, from 17.5% to 12.3%. We had less advertising and promotion activities for the last quarter. In terms of general and administrative expenses, it posted a 15% decrease to CNY 170 million. As a percentage of revenue, the ratio dropped from 22.7% to 15.9%. We have been strengthening and streamlining our management at the same time, which helped curb some of the costs. The business scale that we have been building up also continue to improve operating leverage. With more efficient resource allocation and cost discipline, all 3 main expense items had specified drops in revenue ratio.

Net loss to shareholders rose slightly from CNY 243 million to CNY 270 million due to bigger size of the business overall. As a percentage of revenue, the net loss ratio improved by 2.3 percentage points to 25.3% for the third quarter. This is a solid step to achieve the target of double-digit decrease in net loss ratio for the full year.

The past quarter was a challenging and solid one. Strategic transformation is critical to us. We believe that deeply understanding our financial services business, combined with leading technology, integrated end-to-end products combined with more premium customers will enable us to achieve our objective step by step.

Michael will elaborate more on our new strategy. And I will hand over to Michael now.

Thank you, Yongtao. Let me share with you the richest progress of our stage 2 strategy implementation. If we go to Page 16 of the presentation. We had our Investor Day back in September and introduced our Phase 2 strategy. A quick recap of the strategy.

The new strategy has 3 focus. First one is our customers. We are to focus on the increase of the [August] share of our target customers. The second one is on product upgrades, including the integration of existing products into package as well as the development of Gamma Platform to offer technology infrastructure. The third one is the expansion of overseas markets, especially in Southeast Asia as well as the financial services ecosystem. In the third quarter we see steady and solid development on the Phase 2 strategy.

If you go to Page 17, on the customer front, our premium customer grew about 30% to 601. This already exceed the number for the last year. Our premium product similarly grew 24% to 150, also very close to the full year number in last year.

Page 18 is a snapshot of the major customer wins this quarter. We add new contract with national and joint-stock banks such as Industrial Bank, Agricultural Bank of China, Agriculture Development Bank, et cetera as well as dozens of the large city commercial banks and rural commercial banks. Most of them are already our customers, but we added a new contract in the third quarter.

Also on the progress of integrated products, I would like to share some real concrete examples to show the impact. On Page 19, the first example is an integrated retail vending solution implemented in a rural commercial bank in Northern China. The integrated solution of a single unified middle platform that can support multiple retail loan products. With this solution -- with our solution, the bank is about to -- is able to grow their own retail loan 7x, their market share in the region increased by 25%.

In the third quarter we successfully added a customer activation module onto the existing platform. The module can help the bank to activate those customers who have just a single loan product with the bank and cross-sell other products such as deposits, wealth management, credit cards and et cetera.

Page 20 is an example of integrated commercial banking solution. This is one of the top foreign banks in China. We started the cooperation in 2019 and continued in 2020. This year we see major breakthrough with our integrated solutions. As you can see, we now cover 3 major business lines of the bank. The commercial banking, the micro small business loan -- sorry; the rural banking, the commercial banking as well the micro business products.

We cover the full value chain of the commercial banking business line from sales to product to risk management. Also in the third quarter we added a new contact on the modules for relationship managers to allow them to better serve the clients with their mobile applications.

Page 21, also mentioned by Mr. Ye in the beginning is another initiative of our strategy about the expansion into the ecosystem. In the third quarter we are very happy to see the launch of our Phase 1 of the financial service platform for Hainan corporates. You may recall that about 1 year ago we shared the success of our Guangdong SME finance platform. The Hainan platform is a replication and upgrade of the Guangdong experience. With the experience of Guangdong, we were able to launch the Phase 1 of the Hainan platform in less than 3 months. And also at the end of last week, the platform has connected 11 financial institutions and also 46 products on the platform.

Also on the overseas expansion, on Page 22, you can see that we see very, very good early success in the region. We now serve top 12 top local banks, 3 top original banks, 2 top insurance customers -- insurance companies as well as business of other customers in the region. In the third quarter we added a new contract with the CIMB Bank, Security Bank, Wing Lung Bank and et cetera. Some of them are new acquisitions, like the Wing Lung. Some are existing clients with new contracts such as CIMB. Both of them show strong momentum of the market development and the confidence of our client in Southeast Asian and OCFT products.

Lastly to summarize, the implementation of Phase 2 strategy is steady. We see very, very good momentum. There are early signs of success. For example, our third-party revenue growth was rebounding to 5-quarter highs. The growth of number of premium and premium plus customers was very solid as well as the impact that our integrated solution can deliver to our customers is obvious. We believe we are on the right track, and we have full confidence that the Phase 2 strategy will bring very positive performance in the midterm.

Thank you, Michael. Operator, we are ready for questions. Please open the lines.

(Operator Instructions) Your first question comes from the line of Ethan Wang with CLSA.

I have 2 questions. We appreciate the efforts to have more disclosure for this quarter. So my first question is on Page 9 of the slide. We can see that now we have the revenue mix by products. But just wondering because the largest proportion is from the Gamma Platform, how can we separate that out from the other revenue types, for example, digital retail banking or digital commercial banking because Gamma Platform is all around, I would say, solution to the financial institutions. Shouldn't we just split them out into those other product types? So just wondering how do we make that categorization?

And my second question is on our future strategy. I believe it should be on Page 23 of the sites. And so for our future strategy, road map, just want to confirm from 2025, we say that our main customers will be FIs and start to have ecosystem partners. So first, wondering, does that mean from 2025 we aim to, I mean, decrease, or at least to a very substantial extent, our revenue from the Ping An group? So we will focus on the third-party FIs? And for the ecosystem partners, just wondering what does that mean? Does it mean the other basic cloud providers? Yes, that's my 2 questions.

Okay. I will take the first one. For the 4 integrated products, the Gamma Platform now is the biggest one, as I mentioned when I go through the -- went through the [deck]. The Gamma includes the cloud services platform, include like core systems for both banking and insurance companies and digital management tools and other open platform. So it's more like technology infrastructure, supporting other 3 business lines or 3 business products. Within the digital retail banking, digital commercial banking, digital insurance, they are more like business solution related products. For example, they have -- we will have some business origination in both retail banking and commercial banking. We have risk management modules within those 3. So it's pretty much the 3 -- the retail banking, commercial banking, insurance are more business solutions based. And Gamma Platform is more technology infrastructure. Yes. So that's one (inaudible).

Yes. Ethan, on your second question about our future strategy or Phase 3 strategy. First of all, as we shared on the Investor Day, by the end of Phase 2 strategy -- or by the end of our Phase 2 development, we hope it is our plan that the third-party revenue will become the majority of our revenue. And also on the ecosystem, I think there's 2 aspects to work at the ecosystem. The one aspect is the financial services ecosystem. As we said, we aim to provide a digital transformation not only for financial institutions but also for the financial services ecosystem. The case example we shared in the presentation, for example, the in Hainan, Hainan Province financial service platform is one of the examples of the ecosystem we talk about.

And also we sell multiple others, for example, the regulators, the core company. The purpose of this ecosystem is actually to digitalize the financial services ecosystem so that we have all these -- the data, the customers, the scenarios required to help the financial institutions to support their business growth. Now the second aspect of the ecosystem, of course, as you mentioned, is a [club] ecosystem. We will also be open. We have an open platform. We have an open architecture, and we will have the other cooperation partner to join us to offer the digital transformation for financial institutions.

Your next question comes from the line of Michael Chang with CGS-CIMB.

Can I just check the acceleration of the third-party revenue growth. Which segment -- I see that -- which segment in particular is driving that by revenue type. And then maybe I can get an update on the cloud business, the registration process. When do you expect to ramp up the third-party revenue contribution to a maybe more material level? Yes, that's basically my question.

Yes. Okay. I will maybe answer the first part, third-party revenue where we saw pretty good growth in third quarter, which is [16.1% in the last] 5 quarters. The main driver for the third-party revenue growth last quarter is coming from like the implementation, like the car insurance related, what we call the ecosystem products. So that's the basic more -- main contributors to the third-party revenue growth. And for the cloud [is] we have some customer pipeline. We are still in the process of the application for the -- to the license. And -- but for some (inaudible) products, we had some customers on revenue already this year. Overall, it's the percentage, which is small, and we are expecting only that license to be -- to have more and more third-party customers from the cloud business.

Understand. By the way, now that we are in November, are you perhaps willing to share some FY '22 targets on revenue as well as the net loss ratio?

Actually, we have the -- on open day we have our midterm target. I think in midterm we will make -- we will first break even and then make profit for these 3 years period, yes. We will take that -- we will push forward our progress to that target and make our achievement step by step. Thank you.

(Operator Instructions)

Okay. Thank you, everyone, for joining the call today. We appreciate your interest in following us and looking forward to speaking with you again. That's all for today. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.