Yiren Digital Ltd (YRD) 2017 Q2 法說會逐字稿

Good day, and welcome to the Yirendai Ltd. Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Matthew Li, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. And welcome to Yirendai's Second Quarter 2017 Earnings Conference Call. Today's call features presentations by our CEO, Ms. Yihan Fang; and our CFO, Mr. Dennis Cong; Mr. Cao Yang, our COO and CTO; and Ms. Joanne Liu, our VP of Finance, will join the presenters in the Q&A session.

Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that may cause the actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yirendai's filings with the U.S. Securities and Exchange Commission. Yirendai does not undertake any obligation to update any forward-looking statements except as required under applicable law.

During this call, we will be referring to several non-GAAP financial measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as substitute for the financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

With that, I will turn the call over to our CEO. Yihan, please begin.

Thanks, Matthew. And thank you all for joining the call today. We're pleased to deliver another strong quarter, with loan originations growing by 80% from the same quarter of prior year for RMB 8.2 billion. This brought our cumulative loan origination volume as of June 30, 2017, to RMB 47 billion and outstanding loan balance to RMB 28 billion.

In Q2 2017, we facilitated loans to our 139,000 qualified borrowers. 71% of these borrowers were acquired from online channels, representing 51.2% of our loan volume. Online volume growth this quarter is 129% year-over-year. Nearly 100% of the online loan volume was facilitated through mobile. As of the end of Q2, we had cumulatively served 744,000 qualified borrowers, with cumulative record of borrowers of 33.5 million.

The strong growth from online channels was mainly driven by our continued focus on technological innovation in areas including programmatic online marketing, customer acquisition and the conversion efficiency, data quality and automatic antifraud system.

Despite a continued growth of loan volume, the risk performance of our loan portfolio has remained very stable. This quarter, we launched a new risk grid based on our proprietary credit scoring system, the Yiren Score, in aims of delivering more precise and accurate characterization of our borrowers' credit profile. We have and will continue to invest heavily in our technology, data and AI to drive our operational efficiency and risk management capabilities.

We continue to focus on product innovation. In Q2 2017, about 5% of our borrowers were [peaking] borrowers from the top-up loan product. In addition, based on initial testing results, our insurance policy-based products have shown very stable performance. We expect to open this product to all our customers in the near future. In addition, our Housing Provident Fund-based product has been widely received in the market and has helped us acquire many customers with high credit policies. This product has recently reached the RMB 100 million origination monthly milestone. In the second half of the year, we plan to launch new products that are based on China's social security data. Our commitment to continuous product innovation has helped us improve customer satisfaction as well as maintaining our leading position in the online lending industry in China.

Moving on to wealth management. We served close to 400,000 investors during this quarter. All these investors invested through our online channel and 90% of them use our Yiren Wealth mobile app.

As of the end of Q2 2017, we had cumulatively serviced about 1.1 million customers, and the registered users is about 5.6 million. In Q2, average investment term for our Yidingying product remained healthy at 10 months, with an average annualized return of 7.9%. In addition, AUM per investor continued to increase to RMB 103,000 in Q2. Mobile DAU in March 2017 was approximately 318,000. We aim to build Yiren Wealth into a leading online wealth management platform in China that serves the growing mass affluent population with investable assets of over RMB 600,000. With increased customers seeking this on our platform, we're constantly reviewing our product mix as well as our apps featured in tools to ensure we can (inaudible) our investors' varying demands.

In the future, we plan to provide asset allocation services to our customers through implementing KYC measures and leveraging CreditEase throughout wealth management product portfolio.

Our new platform business, which is conducted through the Yirendai-enabling platform, or YEP, that we launched in March of this year, has shown 30 years of accelerating growth.

We have established a close partnership with several industry stakeholders on data collection and have brought in customer acquisitions and have already seen outstanding results.

We'll continue to work with qualified partner companies to help grow our platform business, and at the same time, optimize industry's efficiency and the customer experience.

For the rest of the year, we'll execute our key strategies as discussed above. Furthermore, we'll also continue to work closely with regulators to ensure our full compliance status with online lending industry guidelines.

I'm very pleased with the progress we have achieved to date. We have been ranked #1 three months in a row by (inaudible) in their online lending platform development index, which further solidifies our leading position in the fintech landscape in China.

I'll now hand the call over to our CFO, Dennis, to discuss our Q2 2017 financial results.

Thank you, Yihan. Hello, everyone. I will first go over our second quarter 2017 financial results followed by our guidance for next quarter and our updated guidance for fiscal year 2017.

We again delivered solid results for the past quarter, with strong loan origination volume and top line growth.

Q2 2017 total net revenue beat our guidance by approximately 10%, increasing 61% on previous year to CNY 1.2 billion, with the corresponding revenue take rate of 14.4%. The strong revenue growth was mainly due to growth of loan origination volume, especially from online channels as well as increased the service fees billed to investors and monthly fees billed to borrowers, as the remaining loan balance continued to expand.

It was partially offset by the impact of deferring revenue recognition nature of the loans facilitated from online channels and monthly fee collection loans, which has a fee collection schedule, with monthly payments in addition to a portion paid upfront.

Driven mainly by loan volume and investor AUM growth, we built fees of CNY 1.9 billion to borrowers and investors in Q2 2017, an increase of 68% from previous year. Our take rate of fees billed was 23% in Q2 2017 similar to the previous quarter and compared to 24% in Q2 2016.

Turning to operating expenses. Sales and marketing expenses were CNY 618 million for the quarter, or 7.5% of the loan facilitation volume, compared to a seasonally low 6.8% in the previous quarter and 7.8% in the previous year. The decrease in sales and marketing expenses as a percentage of loan volume on year-over-year basis was mainly due to the improvement of borrower acquisition efficiency from online channels.

Origination and servicing costs were CNY 93.1 million for the quarter, or 1.1% of loan volume, increased from 0.8% in the previous quarter. Origination and servicing costs increased due to our enhanced efforts in loan collection activity this quarter.

Our G&A expense were CNY 99 million for the quarter, or 8.3% of total net revenue, compared to 9.8% in the previous quarter. The decrease in G&A expenses as a percentage of total net revenue was primarily attributable to the improved operational efficiency and leverage despite our increased level of investment in technology development, artificial intelligence and machine learning capabilities.

In terms of a profitability, we achieved an adjusted EBITDA margin of 32% compared to 39% in the previous quarter and 36% in the same period of 2016. Net income in Q2 2017 was CNY 269 million, an increase of 3% from the same period last year. Excluding the onetime withholding tax for special cash dividend, the adjusted net income in Q2 2017 was CNY 329 million, an increase of 26% from the same period of last year.

On the risk management front, we continue to maintain solid antifraud in credit underwriting process and closely monitored risk performance of our loan portfolio. As 2015 and 2016 vintage loans continue to mature, the risk performance of our loans is consistent with our expectations as demonstrated by the stable delinquency rates and considerable vintage charge-off performance of our loan portfolio.

The current total charge-offs of our 2015 vintage loans with reducing balance are standing at 8.3%, a good indication of our asset quality as well as loan performance. As a leading fintech company in China, we strive to uphold industry best practice for all aspects of our business. We're pleased to see the continuous progress making refining our credit scoring model to deliver more precise and accurate credit assessments of loan applicants. Under the new Yiren Score credit scoring system starting May 1, 2017, we will adopt an upgraded risk grid system with 5 segments to more accurately characterize the risk profile of our borrower base.

Similar to FICO score, the new system has a score range from 300 to 900 that correspond to the credit quality of a borrower. Through our benchmark testing, our Yiren Score has a good correlation to FICO score in terms of the expecting net charge-off rate and actual observed results for each of these score ranges.

For example, a Yiren Score of 700 borrower's credit performance resembles that of a FICO score 700 customer in the U.S. market. The current volume adjusted average Yiren Score of our loan portfolio is around 710, again, another strong indication of the prime nature of our borrower base and loan portfolio.

In aims to further enhance our cash management and to better match our services with the cash position associated with the quality assurance program, we have revised the cash contribution rules of the program effectively July 1, 2017. The company will contribute 30% of the transaction fee collected from the borrowers following the actual fee collection schedule over the life of the loan to a restricted bank account as a quality assurance service fee. The total contribution of the life of a loan approximately equal to 8% of the loan contract amount, which is the same to the current quality assurance program liability accrual ratio. This amendment of cash contribution rules doesn't change the protection level we're providing to the investors, but rather to better match the contribution schedule with the cash collection from the business and enable us to generate higher returns on cash.

On cash flow and balance sheet side, we continue to enjoy strong cash flow from operations and maintain solid cash position. During this quarter, we generated net cash of CNY 530 million from operating activities. As of June 30, 2017, our cash and cash equivalents were CNY 891 million. Balance of held-to-maturity investments were CNY 589 million and balance of available-for-sale investments were CNY 1.3 billion. As of Q2 2017, we had CNY 1.7 billion of restricted cash in our quality assurance program and traffic counts. We also booked CNY 270 million in loans at fair value because of consolidating the trough in ADS.

Our liabilities were mainly comprised of CNY 2 billion in liabilities from the quality assurance program.

Concerning our current large cash position and projected strong cash flow generating capability, to improve our shareholders' return, our Board of Directors have approved a special cash dividend in amount of USD 1.50 per ADS, which is equivalent to 30% of the cumulative net income through the fiscal year 2015 to the first half of 2017.

In addition, our Board of Directors also approved a semiannual dividend policy. Under this policy, semiannual dividends will be set an amount equivalent to approximately 15% of company's anticipated net income after tax in each half year commencing from the second half of 2017.

We continue to see strong growth trajectory of our online credit and wealth management business and invest proactively in building our technology capability and establish new product development programs. However, given our capital-efficient marketplace business model and a strong technology-driven cash generation operation, we believe that dividend payout policy to our shareholders demonstrate our prudent and responsible corporate finance management practice.

With that, let me go over our guidance. For the quarter of 2017, for the third quarter of 2017, we expect loan origination volume to be in the range of CNY 10 billion to CNY 10.5 billion. Total net revenues will be in the range of CNY 1.3 billion to CNY 1.35 billion and adjusted EBITDA to be in the range of CNY 280 million to CNY 320 million. At the same time, based on our strong performance in the first half of this year and expectation of the second half, we'd like to revise our guidance for full year 2017.

We expect loan origination volume to be in the range of CNY 35 billion to CNY 37 billion, an increase of approximately 6% from our previous guidance; total net revenue to be in the range of CNY 4.8 billion to CNY 5 billion, an increase of approximately 10% from our previous guidance; adjusted EBITDA to be in the range of CNY 1.3 billion to CNY 1.4 billion.

That concludes my remarks. I'd now like to turn the call back to operator for the Q&A session.

(Operator Instructions) And our first question will come from Richard Xu of Morgan Stanley.

Two questions for me. One is, I don't know if there's any impact on the strategy so far from the rising interest rate environment in China. I realize that investor cash incentives increased a little bit in the second quarter. Does it mean you're going to change a little bit of strategy on the investor acquisition front? And secondly is on the regulatory front. Certainly, the regulators have tightened the regulatory standards for the whole financial services sector, including fintech. What's the impact on Yirendai? Are we seeing competitors, I guess, decreasing competition a little bit or more exit of some of the smaller platforms? From that perspective, what does it mean for our investor and borrower acquisitions?

Richard, this is Yihan. Thank you for the question. In the second quarter, our cash incentives were a little bit higher because we wanted to build a bigger user base from individual investors, because we are planning to grow our wealth management business into a more general online development management platform. So we really put efforts towards the mass affluent audience and would need the various tech tool to do more targeted sourcing of our mass affluent customers. And going forward, not only will we try to acquire more mass affluent customers, we'll also diversify our funding sources to be prepared for any situation, for example, the interest rate change in the banking industry. So we will introduce institution funding like trust and bank as well as developing our individual investor base.

Yes. And also, let me add to Yihan's answer. In general, actually, because most of the investor individual actually were less sensitive to the recent interest rate rise in the China institution market, our actual annualized returns still keep at 7.5%. So I think that's an advantage that -- as we have an institutional -- investor base of -- individual investor retail base that compared to some of other platform may be more sensitive to the institutional capitals. But still, as Yihan mentioned, longer term, the strategic view of us is to have a diversified source of funding, so we have a more balance in terms of anticipating any potential micro shock or liquidity issues. Follow-up on the next 2 questions. First, regarding the regulation, the tightened down on the industry risk, I think, is definitely a good thing for us as we have demonstrated from our recent Yiren Score. Our asset quality performance has been outstanding, and we believe with the better tightening of the overall financial industry, we're actually going to see much more healthy risk environment within the financial industry. And the next question regarding the competition among the P2P platform. I think with the implementation of the new online lending guidance from the CBRC, there are many second tier, third tier and some even larger platforms are starting to exiting the industry as you'll see in the market news that also, as we have already indicated earlier on, as the industry leader, we will enjoy the benefits of the more well-regulated environment going forward.

Our next question will come from Ella Ji of China Renaissance.

So my first question is relating to the average loan size and average borrower, investor size. So if our calculation is correct, the average loan size for each borrower, it has been declining in the past few quarters. But this quarter, this average size goes up. In the contrary, for each investor, the average loan size has been going up in the past few quarters. But this quarter, it's the first quarter that it goes down sequentially. I just wondered if management can provide some colors behind the turning of the trends.

Yes, I think I will answer the first average loan size. I think as we continue to optimize our risk models, especially with the new scoring system, we were able to optimize the loan approval rate for our best quality borrower base. What means that, not only are we enhancing our approval rate for the overall risk performance of the borrower, we're actually giving a higher loan amounts to the better quality borrowers. So in general, you will see slight trending up of the average loan size, but also the overall loan performance is actually improved.

Yes. And regarding to the investor loan size, we actually measure the AUM, or asset under management per investor, that's one of our KPI for investor. And I am positive that each quarter, it's been increasing. And this quarter, the average AUM per investor has reached RMB 103,000. I believe last quarter, it's definitely lower than RMB 100,000. And this proves that we target more accurately towards higher quality investors or our investors that have more trust in our platform and add more funds in their account or a combination of both.

So as a follow-up. So we have discussed that the -- overall the liquidity on China's finance market seems to be tightening. In the meanwhile, the regulatory environment for the whole P2P market seems also to be tightening, which we think may force out or shake out some underperformers. So with these 2 things considered, I just wonder what's management's expectation for both borrower and investor acquisition costs going forward? So meaning, on the one side, the whole liquidity going down, so it may make it more difficult for you to find investors. But in the meanwhile, smaller players floating out of the market may give you more opportunity for market share consolidation. So just wondered if management can talk about these 2 things, how that's going to affect your business.

Yes. I think as a regulation implementation as well as the recent, overall, the government direction of controlling the financial risk in the financial sector, we actually see -- we're going to benefit significantly from the trend. Basically, you can already see that from our recent Q3 performance as well as our 2017 guidance. We actually see less competition and better customer demand -- enjoying better customer demand as we actually revise our business guidance. We are in good compliance already with the CBRC online lending guidance. That's a very clear indication of our unique position in the market. The current tightening of the regulation is actually putting a lot of less competitive or other nonperforming platforms out of the market that will actually help us in terms of the overall borrower acquisition. And also, we believe as the leading qualified [role] in compliance platform in China, we'll enjoy a very special market position and brand in terms of attracting the investor side customers. Yirendai's asset quality is very outstanding as we have seen from the sturdy risk performance and the good returns generated from our investors. We believe that we will stand out even more through this regulation tightening process that would become -- to strengthen our market leader position going forward.

Our next question will come from Eric Wen of Blue Lotus.

I have 2 questions. One is, there have been several competitors offering loan products, with different loan size duration and target customers. What is company's view on those, especially on payday loans market and whether we intend to pursue this market? And my second question is regarding the dividend. Can you elaborate on the thought process of initiating this dividend policy? And why the management decided to return the cash back to the investors?

I'll take the first one. For other segmentation, Yirendai is clearly positioned to target urban-centered worker with loan size of like CNY 50,000 to CNY 60,000 term loan, which helps like life events, consumer needs. And there have been many new companies that serve very small and very short durations. And currently, we don't have plan to enter that phase. We think that's a totally different segmentation and Yirendai's expertise, and we think the best market opportunity is still the largest size online loan product.

Yes. And also, I think, to add to that, all our customers are actually credit card holders. We believe the type of platform that you mentioned, it provides shorter duration, small amount loans to consumers who mostly don't have a credit card. This is basically serving a revolving debt to them. That's not the key market that we're serving. However, as we have cumulatively served close to 1 million borrower base, with such a high-quality prime consumer base, we will plan to initiate some of our new products other than larger ticket size, longer durations. We potentially provide a shorter duration, a smaller size financing to them to meet their other shorter-term consumer needs. So we will expand into these type of markets. But in terms of the customer segmentation, we'll continue to remain focused on our core prime credit card holder consumer base. In terms of the dividend policy, as you probably can see that our current cash balance combining all the investments and all of the (inaudible) maturity balance together, we probably have about CNY 2.7 billion capital on our balance sheet. And we'll continue to enjoy CNY 600 million or CNY 700 million quarterly top to the cash flow. Our current unique capital (inaudible) model, we -- even we have been very actively investing in our technology capability. We are a technology-driven platform that is -- we do not need a significant working capital to run our business. We are also actively looking for potential strategic directions. We are considering all these options. Even with that, we believe a prudent dividend policy we have set up now about CNY 600 million onetime dividend, about 15% semiannual-based dividend paying policy will still be enough, more than enough capital to drive our strategic growth.

Our next question will come from Ryan Roberts of MCM Partners.

My question is kind of quick, just on the origination and servicing costs, it's a very small item. You mentioned that the slight uptick was due to increased efforts to -- on loan collections in the quarter. Just wondering if you can kind of give us some more color on what the background is?

Thanks for the question. So it's Yihan. The efforts we put to enhance the collection procedure is mainly on the precollection procedure that before the loan gets to the payment phase, we remind the borrowers to repay the loan. And also, for the loan delinquent for less than 30 days, we enhance the collection procedures as well, including phone calls and home visits.

Got you. Okay. If I can just ask kind of just a follow-up on an earlier question. With respect to diversification kind of in the product portfolio -- sorry, the loan portfolio, you mentioned potentially considering more kind of revolving consumption kind of credit. And so I'm curious what management's thoughts are on when that might become more of an interesting factor for us.

Ryan, yes, actually, we are actively exploring revolving and slightly smaller loan size to give a better customer experience. And actually, we are partnering with some leading platform offering line like and revolving products, which will be rolled out this year, yes. But the size of the line would be -- might be smaller than the current term loan, but definitely not near the payday loans, those category.

Yes, in terms of business volume wise, it will still be small this year, probably will grow into a meaningful percentage in 2018.

Our next question will come from Tianxiao Hou of CICC.

My question is about the guidance of the adjusted EBITDA. Will loan (inaudible) a sequential drop in the guidance of this number in the third quarter? Could you help explain the main reason for the potential decline?

Yes. For the dropping of the adjusted EBITDA for the fourth quarter, it's mainly impacted by the new product we introduced in Q2. That's a monthly product, with a fee collection schedule -- with a collection schedule featured by a monthly collection. So in this product, currently, the main portfolio, the fee collection schedule is either 100% upfront or like around 40% to 50% upfront collection, with a monthly fee collection schedule. And this new product is actually with a very small portion of upfront fee, and the majority of the fee is collected on a monthly basis throughout the loan lifetime. And our revenue recognition is actually following the cash collecting schedule. So in the first month or in the short term, it will actively impact our EBITDA margin.

Yes, I think it's a product mix of our online product as was the new monthly collection fee loan product. As we highlighted before, we'd like to have a long-term EBITDA margin of around 25%. I think that will be a good benchmark that you can use to look at our business going forward as our loan volume continue to grow in a very strong trajectory. Particularly, our online channels is growing very strong. We believe if you keep the 25% EBITDA margin, you will be able to see our mid- to longer-term growth in terms of earnings and the profitability. I think I would suggest investors to look at our business that way. These are deferred revenue nature because of the fee collection schedules. But the product can be even more profitable and unique in (inaudible).

(Operator Instructions) Ladies and gentlemen, this will conclude our question-and-answer session, and also, conclude the Yirendai Ltd. Second Quarter 2017 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect your lines.

Operator?

Yes, sir?

The call concluded yet?

That's okay.

That's okay. Don't worry. Thank you.

Thank you for attending today's presentation. Have a nice day.

Okay. Thank you very much.