OneConnect Financial Technology Co Ltd (OCFT) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to OneConnect's Fourth Quarter and 2021 Full Year Earnings Call. (Operator Instructions) After the management's prepared remarks, we will have a question-and-answer session. Please note, this event is being recorded.

Now, I'd like to hand the conference over to your speaker for 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 fourth quarter and 2021 full year 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, Mr. Ye Wangchun, who will start the call with updates of key achievements. Afterwards, our CEO, Mr. Shen Chong Feng; and CFO, Mr. Luo Yongtao, will offer a closer look into our business and financials. And in Q&A session, our Board Secretary and Head of Commercial Banking, Mr. Michael Fei; and our Chief Product Officer, [Mr. Lin Feng] will join too.

Before we continue, 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. A discussion of limitation of non-IFRS measures and the reconciliation to IFRS measures is included in the earnings press release.

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

[Interpreted] Good morning, everyone. Thank you for taking the time to join OneConnect's 2021 Q4 and full year earnings release. 2021 remains a challenging year to economies across the world. Changing macroenvironment and the continuous spread of COVID-19 has made global capital markets even more volatile and have also put US ADRs and OneConnect under pressure.

2021 marks the end of OneConnect's first 5-year strategy of customer acquisition, as well as the beginning of our Stage 2 strategy of customer upgrades, where we broaden engagement with customers and integrate our products. I am delighted to report that we have achieved all 3 of our performance goals in 2021. Revenue grew by 25% to CNY 4.13 billion. At 796, the number of Premium customers increased by 202, twice the increase of last year's -- twice the size of last year's growth. Net loss ratio narrowed by double-digit percentage point to 31%. Amidst both external and internal challenges and pressure, this is no easy feat.

In 2021, external complexities and the pandemic caused great fluctuations in global capital markets. This year, especially come for Chinese ADRs. Since listing, OneConnect has strived to maintain its healthy and a robust position as a listed company. Protecting the interest of all public investors has always been one of our priorities. We are now in the process of returning to Hong Kong market while a dual primary listing. At the same time, we believe OneConnect is undervalued by a big margin. Therefore, we don't plan to issue any new shares.

In addition, the company has been approved by the Board yesterday to buy back 2% of shares in the public market by the end of September. And of course, this will be done while complying with all relevant laws and regulations. This act of confidence shows that OneConnect and its management is committed to long-term and sound development in the capital market.

Looking forward, the pandemic will undoubtedly continue to accelerate global digital transformation in 2022. For financial institutions in China, digital transformation will be of increasing strategic importance. Earlier this year, the CBIRC issued the guidance on digital transformation of banking and insurance sectors, which requires financial institutions to strengthen their overall architecture and highlights the strategic importance of digital transformation.

While underlying capacity building with financial institutions, the guidance also specifies the role technology plays in financial inclusion, digital risk management and data security. At OneConnect, we are confident that our strategy and vision since founding, which is Technology Creates Value Through Expertise will surely generate value for our customers and returns to our shareholders.

Today, we are also joined by our new CEO, Mr. Shen Chong Feng, with rich experience in technology. We look forward to him galvanizing our next 5-year growth strategy. Thank you, and I'll hand it over to Mr. Shen.

[Interpreted] Thank you, Ye Wang. Good morning, investors and analysts. I am Shen Chong Feng. It's been 4 months since I joined OneConnect last October. I'm glad to have this opportunity to talk to you. Prior to joining OneConnect, I served at Kingdee, a renowned international cloud service provider for over 20 years in positions, including the General Managers of branch companies, the General Manager of South China. I've been in charge of sales, products, R&D, delivery and other divisions.

I was personally involved in Kingdee's 3 transformation. As the company's President since 2019, I helped accelerate its business transformation to providing cloud services and SaaS and achieved substantial growth in cloud business and market value. I understand you might be wondering why I chose to join OneConnect at this point, particularly point of time.

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Firstly, I believe in the huge potential of financial technology. The Financial Technology Development Plan 2022 to 2025, issued by PBOC, mentioned that during the 14th 5-year plan, the development of digital economy has gained unstoppable momentum. This is a market of over an estimated CNY 1 trillion with even more unlimited potential. OneConnect's unique advantages in financial technology is my second reason.

With support from Ping An Group and the company's unique business plus technology model, we can turn Ping An-proven technologies into fintech products and empower financial institutions to improve efficiency and service, reduce cost and risk. Within 5 years' time, OneConnect has achieved revenue of over CNY 3 billion, which may take other tech companies 10 and even 20 years to do so. Lastly, like the enterprise service industry, financial technology also needs to go through digital transformation. In fact, I'm confident that my personal experience is a valuable asset to OneConnect development and will help it return to its fair valuation and become industry leader.

My journey at OneConnect started with many delightful surprises. Firstly, I see huge demand in the market. Small and medium-sized banks who want to expand their operations with the help of digital transformation, want to learn from Ping An's successful experience and its concrete plan to achieve digital transformation. And that is exactly what OneConnect is mandated to do. In the past 6 years, we have acquired many customers and build up trust. With most of products market proven, we will further broaden engagement with the customer -- with our customers and improve our products in the future.

Secondly, our strategy is clear. We will focus on our target customers that is financial institutions and at the same time, develop ecosystems and expand overseas. We will also continue product iteration and upgrade and improve the company's profitability. Lastly, we have a very diverse and professional team with both tech talents and financial professionals on our management team and staff. We can learn from each other and make the company better together. Of course, OneConnect is still a young company. We still need to improve gross margin and third-party revenue.

We are now in a very dynamic world and I've been thinking a lot about OneConnect's future direction. As China is shifting from customer -- consumer Internet to industry Internet, I believe financial industry's growth will be highly dependent on technology. IT will be intertwined with business. But digital transformation takes time and leadership. Therefore, OneConnect will focus on building innovative and differentiated business systems and core systems to help financial institutions' ecosystem and overseas clients improve efficiency and service, reduce cost and risk and ultimately achieve transformation. As always, we will be customer-oriented, build SaaS products to satisfy our customers' needs and achieve our vision of Technology Creates Value Through Expertise.

Thank you.

Thank you, Shen Chong. Next, CFO, Mr. Luo Yongtao will go through the financial results in more detail. Luo Yong, please?

Okay. Thank you, [Danielle]. Good morning, everyone. Just as Chairman Ye said, we are delighted to see we have achieved all 3 full year targets. I won't go through the details on this page. Starting from the next page, top line revenue. We achieved CNY 1.28 billion in the fourth quarter of 2021, which was 19% more than the same period in the previous year. For full year 2021, our revenue was CNY 4.13 billion with a 25% growth on a year-over-year basis. Looking into the revenue breakdown, you can see that we have maintained a relatively stable customer mix in 2021. Revenue from third-party customers increased from CNY 1.24 billion to CNY 1.39 billion, representing a year-over-year growth of 12%. It contributed 34% of last year's total revenue. Our third-party revenue growth was mainly benefited from the development of banking risk management products and insurance service ecosystem.

Although, the business restrictions caused by COVID-19 last year impacted our implementation sector, we are delighted to see an expansion for the full year. Revenue from Lufax increased year-over-year to CNY 428 million from CNY 343 million, which was 25% growth. Lufax contributed 10% of the total revenue in 2021, same as the year before. Revenue growth from Lufax was largely driven by the boost of risk management, operation support as well as cloud services. Revenue from Ping An Group rose 34% from CNY 1.7 billion to CNY 2.3 billion, which accounted for 56% of our total revenue. Ping An Group revenue was mainly benefited from the increase of cloud services platform. We also see increased demand in risk management services.

Moving to revenue mix by business type. The cloud services platform and risk management offerings were 2 main drivers of our revenue expansion. Cloud services platform increased from CNY 314 million in 2020 to over CNY 1 billion in '21, which was 234% growth, accounting for 24% of the total revenue. Launched more than a year ago, this business allows us to penetrate from application level to infrastructure level, strengthening our revenue resilience and connections with our customers. It is also one of the most important services of integrated technology infrastructure in our new strategy.

Risk management also performed well in 2021. Revenue grew by 47% to CNY 534 million from CNY 363 million, led by fast claim solutions for auto insurance and risk analytics for both retail and commercial banking sectors. Company continues to take advantage of our unique technology plus business strategy and put more emphasis on the risk management products. While our financial institutions' customers are more and more focusing on building their own IT capability, we will keep supporting them by providing comprehensive solutions, integrating technology with our industry expertise and broad business scenarios.

In terms of size, revenue from operation support remained the biggest part of our revenue in 2021, accounting for 27% of our total revenue. The amount of operation support increased from CNY 1.06 billion to CNY 1.1 billion. Products such as auto insurance services, AI voice, electronic certificate authority were the main revenue drivers. Implementation revenue decreased 14% year-over-year to CNY 734 million from CNY 852 million in 2020.

The number of implementation projects from Ping An Group showed a temporary drop last year, while our revenue from third-party customers still saw a growth despite the impact of COVID-19. The drop in business origination continued in 2021 from CNY 606 million to CNY 451 million with a 26% decline. That is because we kept optimizing the product mix proactively and [exiting] out low-margin products. Our overall revenue growth is supported by a diversified solution suite. The balanced business portfolio helps us strengthen our resilience through economic cycles and partnerships with customers.

On the Investor Open Day in last September, we announced the product integration strategy and combined them into 4 segments; Gamma Platform, which includes cloud services, core systems, digital management and open platform, is a technology infrastructure supporting the other 3 business segments. It accounted for 47% of company's total revenue. The digital retail banking and the digital commercial banking contributed 33% and digital insurance, which includes fast claim auto service management platform and auto insurance ecosystem contributed 19%. Also, we have a virtual banking business in Hong Kong, which progressed smoothly and contributed about 1% of our total revenue.

We achieved a strong momentum in customer growth in 2021. The number of our Premium customers grew from 594 to 796 or by 34%, almost doubled the incremental amount in the prior year. The number of Premium Plus customers, which will be our key focus, grew from 168 to 212, 26% higher year-over-year. It was largely benefited from our second stage strategy on deepening the customer engagements and integrating product offerings.

Premium Plus customers from financial service industry and related ecosystem both saw favorable improvements. The net expansion rate of Premium customer was 96%, which was improved by 12 percentage points than the prior year. We are happy to see the progress. This is mainly due to the repurchases from our Premium customers and the rise of our average revenue per user. AR growth also reflected that our strategy to phase out products are at an advanced stage. We target to keep improving our ARs in future.

Moving to the gross margin. In the fourth quarter, year-over-year, the metric improved from 34% to 35%. However, the full year gross margin decreased to 35% against 38% in 2020, which reflected the changes in mix of the products. For the non-IFRS, gross margin is slightly decreased to 41% from 33% in the prior year for the fourth quarter and the full year narrowed to 42% from 47% in 2020. We have been prudent on the research and development capitalization and keep it stringent. However, if we look at a quarter-over-quarter basis, the metric reflected a constant trend. We're expecting to see gradual improvements through standardizing, upgrading and integrating products and phasing out low-margin products as well as business expansion of high-margin products in the future.

Next page is the numbers of the Q4. I will skip this one and spend more time on the full year. Next slide shows the full year results. Let's look at them one by one. On a year-over-year basis, our research and development expenses rose 15% to CNY 1.35 billion from CNY 1.17 billion in the prior year, as we continue to invest in innovation and in new solutions such as cloud services platform and other products.

Even though some products are rapidly more mature like in banking and insurance sectors, upgrade and enhancement are always called for. Yet as a percentage of revenue, the research and development expenses were lower from 35% to 33% on a year-over-year basis. It is relatively high compared to the market level because we keep investing significant resources to research and development to support our existing product offerings and to incubate new initiatives to enable us to maintain our leading computation position.

In terms of sales and marketing, it slightly decreased 7% from CNY 629 million to CNY 588 million. As a percentage of revenue, it reduced by 5 percentage points from 19% to 14%. The expenditures we have spent on marketing and promotion activities was a bit less last year. Regarding the general administration expenses, CNY 842 million is only less than 1% increase compared to 2020. As a percentage of revenue, the ratio dropped from 25% to 20%. We have kept strengthening and streamlining our internal operation and insist cost discipline, which help us cut costs. Overall, the business skill that we have been building up continues to improve operating leverage along with more efficient resource allocation.

All 3 main expense items had [certified] drops in revenue ratio. Our full year operating margin was negative 34% with a 10 percentage point improvement than the prior year. This successfully led to our double-digit improvement of our net profit margin from negative 41% to negative 31%. The double-digit net profit margin improvement is a solid result. We build keeping step with our cost to control methodology and try our best to further expand our business skill at the same time.

We summarize our key financial metrics as well as non-IFRS reconciliation details in the next 2 slides for reference. Should you have any questions, please feel free to ask me in the QA session. In conclusion, last year, we launched the strategic transformation, which I firmly believe will push us to a high position. With a solid 2021 results, I'm confident to achieve our mid target -- mid-term targets.

Now I would like to hand over back to Mr. Shen to elaborate more on our Phase 2 strategy and outlook. Thank you. Shen?

[Interpreted] Thank you, Luo Yong. Next, I will introduce our plan in 2022. Page 17 shows OneConnect strategy road map that we released on our Open Day. Within the 6 years after founding, we have wrapped up customer acquisition and is currently at the stage of customer upgrades. Next, I will elaborate on our Stage 2 strategy. The financial technology industry in China has established the basic framework and is now on its way to transform financial services. On our Open Day last year, we unveiled our Stage 2 strategy, which focuses on serving financial institutions, including banks and insurers, empowering ecosystem that is regulators, governments, enterprises and industry partners and expanding overseas to Hong Kong, Southeast Asia, et cetera.

In the future, we will further integrate our products, make sure our business is more focused and our products more standardized. At the same time, improving the number of customers with annual revenue of over CNY 1 million will be our priority. To do that, we will expand marketing efforts on our customer -- on our new customers on the one hand and upsell or cross-sell to existing (inaudible). We will expand marketing efforts on new customers on the one hand and upsell or cross-sell to existing customers and extend our contracts as well. In addition, better strategy execution, which is another priority in the second stage, we believe will give a boost to operation efficiency.

Our strategy is based on 2 observations. Firstly, ROE is dropping globally. That means the imperative need for technology to drive digital transformation in financial institution and future market opportunities will be very important. Based on our research, banks with more effective IT investment generally have higher ROE than peers. We actually have done a lot of research in -- when we are planning our strategy in 2022.

This January, CBIRC issued the guidance on digital transformation of banking and insurance sectors, which highlights the strategic importance of digital transformation. The guidance promotes digital financial inclusion and building digital risk management capacity, encourages self-build key technologies and technology exporting and underlying data security. In this document, CBIRC also outlines the requirements and expectations for 30 key tasks. We believe the coming 3 years will be the crucial window where financial institutions become competitive digitally.

With its unique technology plus business model, OneConnect strategy has been aligned with what regulators encouraged since day 1, which means we have always strived to build standardized products with Ping An-proven best practices and years of experience in technology to empower financial institutions with digital capacity and help them improve efficiency and service, reduce cost and risk. In this way, we benefit all parties involved, including regulators, financial institutions and enterprises and tap into tremendous potential. In terms of using home-developed IT products, OneConnect is also a step ahead of the game. All 4 of our business lines accommodate home-developed products preparing us for future demand.

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Hello, operator, can you hear us? Because we are hearing some echo.

Yes. You can continue now.

Yes. Thank you.

Next, I will share with you 2 examples of our product upgrades. The first product is our digital financing platform. Customer acquisition, risk management and the lack of platform has made financing more difficult. To address these issues, we build an end-to-end platform covering marketing, risk management and industry scenarios. The platform provides more precise customer acquisitions, smarter risk management and smarter operation to financial institutions. Its risk management system has over 2,000 spin-off indicators, over 600 warning rules and as much as 100 modules. As we have put it all in 1 package, it takes nearly weeks to deploy. Over 10 banks are now using this platform, covering more than 2 million SMEs and distributing approximately CNY 100 billion of loans every year.

I also want to share new development in our digital banking, digital insurance and Gamma Platform. To better align with the regulators' requirements at application level, 95% of these products have been included into the list of home-developed IT products. The rest, we believe will be recognized by the end of 2022. At infrastructure level, our financial cloud fully accommodates home-developed infrastructure. We are also a member of IT Application Innovation Working Committee and participated in PBOC's Financial IT Innovation Ecological Laboratory.

Next, I want to draw your attention to our efforts on customers. Thanks to our strategy upgrade in 2021, customer growth registered good momentum. The number of Premium customers is up by 202, twice the increase in 2020 to 796. Premium Plus customers grew by 44 or 26% to 212. This year, we were focused on 1,000 target customers and cross-sell. We will design differentiated tactics to increase our pipeline and improve conversion. We also made some internal structural adjustments. We have expanded our presence by setting up branches in 10 key provinces to better reach local rural credit unions and key city commercial banks. Furthermore, we have also established a customer success team to cross-sell or upsell to our existing customers and extend our contracts. Despite all the challenges we may face in 2022, we will continue the execution of our Stage 2 strategy.

To sum up, 2022 will be a year about maintaining stable third-party revenue -- third-party revenue contribution and sustained and recurring growth. Lastly, I want to reiterate our mid-term objective. Become top 3 in revenue among comparable periods, third-party revenue becomes the majority, have over 1,000 Premium customers, more than 500 Premium Plus customers. NER reaches 100% to 120%. Non-IFRS gross margin surpasses 50% and become profitable.

With that, I will end my introduction. As the CEO, I believe I speak for the management team as well. We are confident about reaching our operating objectives in 2021. Thank you for your support and for your time.

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

Our first question comes from Yang Liu from Morgan Stanley.

I will do a quick translation. The first question is regarding the implementation revenue. We see there is some decline last year due to the COVID and also less business from Ping An Group. But we note that's a leading indicator for the product revenue. How should we think about the next year of product revenue given 2021 implementation revenue is not very good? Is it a delay? Or it means that a little bit tough environment in 2022?

The second question is for financial industry, the application standardization is a big issue or it's very hard to see very high standardization in application level. And I would like to ask where should we see the upside and what can be done to improve the standardization in this sector? And the third question is for CEO, Mr. Shen, I would like to hear since you joined the company, what is the thing that beyond your expectation? And what is it you see has the biggest room to improve?

[Interpreted] On implementation, if you look at our revenue structure, as I have explained, the effect -- the implementation revenue is mostly affected by the drop in the number of Ping An-related Group. Also, the pandemic played a role. However, if we look at the third-party implementation revenue, it is actually increasing, which is why we believe in the future this product will still be a big chunk of our recurring revenue. Judging from our pipeline right now, we believe implementation revenue will be very sustainable in the future. Thank you.

[Interpreted] Now answer your question on standardization. All IT systems, whether it is Chinese developed or international IT systems go through customization to standardization. Even the popular EPR systems we use -- ERP systems we use every day, started with customized products. But ultimately, it become standardized. Also, we have the technology support to achieve standardization. Most of the products are cloud native nowadays and we also have the container technology and many other emerging technologies to support standardization. In front-office applications, we need to be more agile and need to promote that. And the main office platform have been -- can be shared among -- with different parts of the process. Therefore, we believe we already have the technology to support standardization.

Secondly, customers, I've actually visited a lot of financial institutions myself. And I found that they demand not a simple standardized products. For them, the tech department does not speak business language, whereas the business people think tech people only know about functions. And this creates an opportunity for standardized products designed by OneConnect because if you want to have a simple -- have a standardized product, it's not only about technology, you also need to incorporate best practices and business insights into it. So, standardization is not only about technology, it's also about business and that demands professionalism and expertise, which is what we can offer.

The standardized products maybe out of reach for traditional tech companies and in-house IT teams in financial institutions. We need a player like OneConnect to export Ping An business experience and technology to banks to satisfy their needs. And I believe this is the answer to standardized products in the financial service industry. In my introduction, I showed you 2 examples of our successfully standardized products and over the long term, we will continue to invest in IT and put more investment on R&D.

On things that we need to improve. Firstly, I think we can do more about product integration. We have achieved a good customer base. However, we still need to sell more products to each customer. We also need to improve third-party revenue so as to increase more stable and recurring revenue. That's what our customer success team is about. This year, we will use them to serve -- to better serve our existing customers. Thank you, and that will be all.

Our next question comes from (inaudible).

Congratulate on the results. I have 2 questions around the capital market. And first one is about your controlling shareholder Ping An Group on your market cap and what's their value of the share price? And if they're going to overweight their holdings in the future? And my second question is that as management just mentioned, we are considering to get listed in Hong Kong, but with self new share insurance. And I wonder how it works and what the company's consideration behind that? And I will do translation for myself.

We had a Board meeting yesterday. During the Board meeting, the Directors from Ping An Group also mentioned that they have full confidence on the company's performance as well as our second stage strategy. And they expressed that at appropriate time, they will also consider to increase the shareholding of the company in the future. So, the second question -- the answer to the second question, actually, there is a special format of listing by introduction according to the listing rules in Hong Kong Stock Exchange. We are actively working together with the various agents as well as the communication with the regulators to see the possibility of investing by introduction of OneConnect in the near future.

Hello, operator, we are ready for next question.

Our next question comes from Ethan Wang of CLSA.

We are a bit running up time. Maybe we can take one more question. Thank you.

Ethan, please proceed with your question.

My question have already been addressed earlier. So no new. Thank you.

Operator, we can take one more question. Thank you.

Our next question comes from Alex Yao from JPMorgan.

So my question is to follow up on your medium-term strategic target. First of all, what you exactly are you planning to achieve those medium-term strategic targets? Secondly, in order to achieve those targets, what are the efforts we need to make in the next several years?

[Interpreted] We proposed our mid-term target in the second half of last year. And we expected that it might take us about 3 years to achieve this objectives on customer revenue and third-party revenue. Our effort is actually -- are actually included in our Stage 2 strategy. We will focus on financial institution customers and empower ecosystem customers that is regulators and enterprises and we will also expand overseas to Hong Kong, Southeast Asia, et cetera. As I've explained, we will focus on third-party revenue, which as Mr. Shen also introduced will be our priority. We will try to improve the number of Premium customers and we will improve integration of our products. And in addition, we will also focus on metrics like NER to make sure that we achieve our mid-term goal. Thank you.

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

Thank you. Ladies and gentlemen, this concludes today's call. Thank you, everyone for joining. You may now disconnect your lines.

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