Pintec Technology Holdings Limited

And welcome to the PINTECH Full Year 2020 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Joyce Tang. Please go ahead.

Thank you, Operator. Hello, everyone, and welcome to Pintech's 2020 Three-Year Earnings Conference Call. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.pintech.com. A replay of the call will be available on the IR website in a few hours. Participants on today's call will be Mr. Victor Lee, CEO of Pintech. and Mr. Steven Singh, CFO of PinkPak. Management will begin with prepared remarks and the call will conclude with a Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe proper provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, The company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that PIN test earnings press release and discomfort call include discussions of unordered gap financial information as well as unordered non-gap financial measures. PIN test press release contains a reconciliation of the unordered non-gap measures to the unordered move directly comparable gap measures. I will now turn the call over to our CEO. Mr. Victor Lee, please go ahead.

Okay, thank you, Joyce. Hello, everyone, and thanks for joining today's call. Before I start, I wish you and your families are staying safe and healthy. In today's call, I'll first review our 2020 performance. Then I'll discuss some updates, our strategic initiatives in delivering long-term value. As expected, 2020 was probably the most challenging operating environment in the history of Pintech. as we were affected by an unprecedented global pandemic. However, 2020 was also a pivotal year in which we initiated our business transformation in eliminating legacy services, optimizing product mix and corporate structure, controlling operating expenses, and reducing risky assets. As you may recall, in 2020, our business has been restructured into digital technical services and digital operations services. And our long-term strategy is to augment the revenue and the profitability of digital technical services by increasing recurring revenue while stabilizing digital operations services by refining asset quality. Given this backdrop, for full year 2020, while our revenue has been significantly impacted by a decline of 71%, comparing to 2019, we are in full speed execution along our defined strategy. And I would like to mention a few of our achievements and wins in demonstrating our technical advancement and the business partnerships. Firstly, for digital technical services business, which includes digital retail credit management, corporate credit process management, intelligent wealth management, financial robotic process automation, and the digital banking transformation. We now have over 400 corporate clients in further diversifying our revenue sources. In addition, we are focused on revamping our revenue model from the traditional loan facilitation, transaction-driven nature, to recurring revenue of software services and the infrastructure sales. For 2020, we are pleased to report that this recurring revenue contribution has increased from RMB 5.6 million to RMB 21 million in 2020, increased close to three times compared to 2019. Although it is still in early stage, but it showed the good momentum, and we believe it will continue to drive the growth. As our revenue model evolves, our intention is to continue to deepen contractual services with the existing and large corporate partners. while expanding our services to small and medium regional financial institutions. We are seeing some early success as we leverage our core AI capabilities and retail loan expertise in empowering clients in their digital transformation efforts and the channel expansion. For example, for domestic clients such as China Telecom BestPay, who has been our long-term partner, we initially began our relationship in installment loan Now we have significantly expanded our collaboration into risk analysis and management, as well as various software models and system designs and implementation. We also gained a few new mandates from domestic companies in 2020, such that Industrial and Commercial Bank of China has accepted our SME risk and account management solutions for its micro and SME lending business We partnered with Aspire, a subsidiary of China Mobile, in enabling its intelligent fintech solutions and digitization, especially for 5G applications. We also completed the phase one digitization of the supply chain financing operation for China Daily Group, who is one of the largest agriculture product wholesalers in China. For overseas expansion, we successfully partnered with Janko and Weegepay, respectively in launching next-generation online lending platform, leveraging our end-to-end modularized digital lending capabilities to offer unsecured loans quickly and efficiently in Australia. Earlier in 2021, we also found a strategic partnership with Judo Bank of Australia in order to provide cloud-based intelligent credit installment solutions with upgraded credit process management. Our other collaboration with Eastways Bank, UB Bank, and Toyota Finance continue to be on track as we expand throughout Europe, Oceania, and Africa. These overseas market penetrations are strong testaments of our capabilities in competing and winning against global players. Next, for digital operations services business, which mainly includes our traditional license loan origination and facilitation. As we mentioned in the last call in 2020, we continue to actively prioritize asset quality over asset quantity, reduce risk-taking collaboration, enhance profit-sharing model, partner with high-caliber industry leaders, and expand the market into and expand the market to incorporate more of our digital technical services and solutions. This strategic decision has resulted in our total revenue decline for 2020, primarily because our total facilitated loan volume decreased by 83% over a year to $1.8 billion. However, the risk-free loan facilitation has significantly increased to about 50% of the total loan volume in 2020. compared to 30% in 2019, which means we are on track in enhancing our risk profile. In the long term, we are confident that this will allow us to redeploy resources, strengthen our core digital technical services business, and enhance the quality of revenue composition. For some updates, our micro-lending company, Ganzhou Aixin, is now formally interfaced into Bank of China's credit data center. with full-scale access to real-time credit data reports and inquiries. Ganzhou Aixin is the very first internet microloan company in Jiangxi Province to be linked directly into Bank of China. Toward the end of 2020, we have also started to focus on the expansion of our insurance brokerage business, leveraging our insurance brokerage license and exploring new channels. Now, let me provide some updates on our broader array of strategic initiatives and outlook into 2021. But please be reminded that there are still some uncertainties from the global pandemic. Firstly, on a macro level, the global pandemic and the increasingly stringent regulatory oversights from Chinese governments are actually accelerating digitization from financial institutions in order to fulfill the demand from customers. It is estimated that in 2020, fintech investment in China was about US dollar 30 billion, representing an annual growth of 14% compared to 2019, according to our research. Therefore, we see immense potentials of digital transformation from these disruptions, which are our opportunities. as we are all well positioned in this sector with long proven track records of all around innovation and execution. Secondly, we'll continue to invest into our technical talents and advancements, especially for AI, big data, machine learning, in order to enhance our capabilities in digital transformation and stay at the forefront of the fintech industry. Our target is to better enable our partners in a more integrated automated and fast operation with reduced costs and risks. This drives our focus on product and service advancement and optimization, as well as for the overseas expansion in order to capture global growth opportunities. Now, specifically for digital technical services business, we'll continue to leverage our domain expertise and technical innovation in optimizing standardized modules and collaborating with partners for customized module developments. In order to provide end-to-end, fully digitized solutions of retail SME loan origination, servicing, funding, collection, risk analysis, and customer management for both existing and potential corporate clients. In terms of further business expansion, we are open to collaboration with local government entities in establishing big data platform in empowering SMEs for funding and risk management. We are also excited about duplicating our retail loan successes overseas as we deepen our partnership in order to upsell and cross-sell to our other services, such as wealth management. Next, for digital operations services business, we'll continue to leverage our internet microloan license to originate and facilitate retail loans in compliance to regulations and to our internally more stringent risk profile. We expect this finished revenue to continue to stabilize. Our data analysts and engineers mine this data with cutting-edge AI techniques and machine learning to continuously refine and optimize risks and underwriting terms. So we will continue to leverage this business in building proprietary software and systems to deliver seamless, highly automated, and broadened access to retail credit with unique customer experiences. In addition, we are extending these data and technology advantages into our insurance business for 2021. Aside from organic growth execution for both of our business units, We are also actively engaged in mergers and acquisitions in order to accelerate our growth plan, especially under the current environment. Our M&A strategies are to broaden our overall offerings, pioneer advanced technology, build deeper relationships in fulfilling client, infrastructure, and software needs, as well as geographical expansion with complementary market penetration. For recently, As you can refer to our present releases, we are very excited to have added a new partner of talented teams with proven operating capabilities, product diversification, and in-depth technology know-how. This will further accelerate our capabilities in servicing our corporate partners in order to drive growth and shareholder value. Finally, having discussed all these strategic initiatives, I want to emphasize that we have and will continue to be very disciplined on our cost containment and liquidity protection in order to minimize the overall impact on our business fundamentals, which Stephen will discuss further later. So in summary, 2020 was a challenging year in many aspects. We worked very hard as a company in revamping business models, in relating a stronger business foundation, and in navigating those challenges to continue to deliver differentiated values to our clients. We now see great opportunities as people change the way they live, work, and consume. We remain committed and focused on executing our clear strategy of innovation and scalability in order to deliver long-term shareholder value. We greatly appreciate the dedication from our employees, as well as the continued trust and support from our partners and shareholders. With that, I'll turn the floor over to our CFO, Steven Sim, to review our financial results in more details.

Thank you, Victor. Hello, everyone. I'd like to begin by echoing Victor's sentiment that all of you and your families stay safe and healthy. Before I start the full year 2020 financial discussion, I would like to make some comments. Firstly, as already mentioned by Victor, the unprecedented pandemic and our internal business transformation in 2020 significantly impacted our top and bottom lines. However, as we intensely review and lay out our business foundations, we believe these uncertainties are short-term. Second, given the macroeconomic headwind and the domestic PRC regulatory tightening of the financial markets, we had to undertake several one-time write-offs, including impairments for goodwill, intangibles, and investments, totaling RMB 85.3 million, which represents about 30% of our net losses for 2020. We do not expect any future financial impact from these items. Thirdly, as part of our business transformation, we made a difficult decision to aggressively cut our expenses where necessary, So unfortunately, we had to reduce headcount by 39% and all other associated costs in 2020. However, we will focus on continued investment into our core talents and capabilities, discipline cost management, as well as enhance our balance sheet and liquidity position, which can be demonstrated by our successful RMB 400 million financing in 2020. Finally, mergers and acquisitions will be another pillar of growth driver for future development, as demonstrated by our recent announced acquisition of Richbrite, which is a licensed securities brokerage firm, and Jisen Tai, which is a securities technology firm, which is the core technological background of Richbrite. We believe in the value that these two acquisitions will create going forward. They will lay the foundation of our wealth management business in the future. We are focused on long-term synergistic values in terms of business model, management philosophy, technical empowerment, team talents, while we are also very prudent in reviewing financial leverages and growth potentials. Now turning over to our financial results for 2020. And as usual, please note that all numbers stated in the following remarks are in RMB terms and all comparisons are for year-over-year basis unless otherwise specified. Total revenues for full year 2020 decreased by 70.6% year-over-year to RMB $378.3 million. In terms of revenue breakdown, technical service fees for 2020 decreased by 69.3% to RMB $330.7 million. mainly due to the decrease in all balance sheet loans facilitated during the period. As part of our business changes in actively minimizing our risk-bearing loans, the total loan volume facilitation was $1.8 billion in 2020 compared with that of $11 billion in 2019. However, the risk-free loans facilitated was increased from 30% in 2019 to 50% in 2020. Revenues from installment services in 2020 declined by 77.2% to 42.7 million RMB. This decrease was mainly due to the reduction of on-book installment loan volume due to the COVID-19 outbreak and was in line with our ongoing strategy to optimize our portfolio structure. Lastly, revenues from wealth management service in 2020 decreased by 75.7% to RMB 4.9 million primarily as a result of our insurance brokerage business growing slower than we previously expected. During this period, we implemented a series of optimization initiatives to refine our insurance brokerage business model and terminate the cross-selling with retail consumer finance products. However, towards the end of 2020, we completed the revamping of our insurance brokerage business and we expect rapid growth of this business under the new market-oriented model in 2021. Cost of revenue for the full year of 2020 decreased by 62.9% to RMB 285.8 million from RMB 769.7 million in the same period of 2019. This decrease was mainly attributable to several factors, including the decrease in origination and service fee from reduced user acquisition costs as a result of loan volume facilitation decline. Also, the decreased cost on guarantee liability for off-balance sheet loans as we purposely and gradually stopped providing any guarantee in 2020 in order to significantly enhance our asset quality. And lastly, the decrease in service costs charged by the related party because the company sees our original corporation model under which the related party used to provide credit enhancements for the borrowers since the beginning of 2019. resulting to a further decrease of the loan balance and the related costs under such model in 2020. All of these efforts led to the significant improvement of the delinquency rate since the second quarter of 2020. We will continue to reduce our risk-bearing loan business. In 2020, as costs on guaranteed liabilities and the service costs mainly related to the legacy business, there was almost no new loans facilitated under the guaranteed or risk-sharing model. In fact, we only provide guarantees for our financial services, which we operate with our own licenses, while all other loans that we facilitate will gradually switch to a profit-sharing model without any guaranteed services, minimizing the overall volatility in profitability in the future. Gross profit in 2020 decreased to $92.5 million. This represents a gross margin for a full year of 2020 of 24.5% compared to 40.1% in the same period of 2019. This is a reflection of the lower margin, higher quality, less risk-bearing business. Going forward, as we focus on the SaaS-based digital technology services, we expect gross margin to improve in 2021. Total operating business in the full year of 2020 decreased by 75.9% to RMB 299.3 million from RMB 1.2 billion in the same period of 2019. We have continued to optimize and refine our organization structure, marketing strategies, and product portfolios since the beginning of 2020. Let's now review the specific operating expenses, and I'm pleased to report that we have aggressively reduced every cost category. Sales and marketing expenses in 2020 decreased by 35.8% to $44.7 million from $69.6 million in the same period of 2019. primarily driven by the decrease of promotional expenses from the reduction of online advertisement and a decrease in staff costs from corporate structure. General and administrative expense in the full year of 2020 declined by 86.5% to $147.8 million from $1.1 billion in the same period of 2019. This decrease was primarily driven by decreases in the reduction of bad debt provision expenses related to loans under the related party agreement from $890.7 million in 2019 to $7.8 million in 2020 due to the decrease in loans, and also staff costs and professional expenses decreased by approximately $31.9 million due to personnel structure optimization and reduction in consulting expenses. Research and development expenses in 2020 decreased by 52.6 percent to 37.5 million from 79.1 million in the same period of 2019, primarily driven by the decrease in staff costs from personnel structure optimization as part of our business transformation. Impairment of group view and tangible assets in 2020 increased to 69.4 million from new in the same period of 2019, primarily due to 37.6 million impairment for group view and 31.8 million impairment loss for intangible assets associated with the licensed operator, the small-owned business owned by Gansu Icing Network Microfinance Company, considering the tightening regulation and changing market environment. However, the company expects no future impact. As a result, operating loss in the full year of 2020 was $206.8 million. Tax expense increased to $49 million. compared to only $2 million in the same period of 2019, primarily due to the deferred tax expense of $46.9 million caused by the increase in the valuation allowance for a deferred tax expense of $87.3 million in the year 2020, as management determined that the deferred tax asset will less likely be utilized in the future, while it was deferred tax benefit of $70.3 million in the year 2019. Therefore, net loss and adjusted net loss for 2020 were $296.1 million and $284.2 million, respectively. However, excluding the above-mentioned one-time write-offs and the impact of the decrease in deferred tax asset balance, our net loss and adjusted net loss for the period of 2020 should be $147.2 million and $135.3 million, respectively. The net loss was mainly due to the legacy business, and it was well decreased It has well decreased in the second half of 2020 as compared with the first half of 2020. Diluted gap and diluted non-gap adjustment adjusted net loss for ordinary shares in 2020 were RMB 0.99 and RMB 0.96 respectively. Now let's turn over to our balance sheet. As of 31st December 2020, we had combined cash and cash equivalents short-term and long-term restricted cash of $522.3 million as compared to $580.9 million as of December 31, 2019. Total net financing receivable, including short-term and long-term receivable, decreased by 83.6% to $73.6 million as of December 31, 2020, from $449.5 million as of December 21, 2019, mainly due to the lower volume of our own book loan business. In conclusion, we are very proud of what the team has collectively achieved during the transition period under COVID-19 outbreak, and we are very excited about what we could achieve in the years to come. Looking ahead, we will focus on ramping up revenues in our digital and technical service business which we expect to be our key revenue driver in the long term. We also continue to refine our asset quality for digital operating services as well as our licensed financial services in order to optimize our risk profile. Despite these short-term impacts, we are confident that these changes will bring solid foundation and sustainable development for the future. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Ling Tan from ICDC International. Please go ahead. Hello, Ling, is your line muted?

Thank you, management, for taking my questions. I have two questions regarding the Richard Bright and Zhiyuan Tai acquisition. My first question is what revenue contribution do you foresee from this acquisition, and what's the margin profile changes from this acquisition? And the second question is, how will you integrate this acquisition into your wealth management services? And could management give us some color on their wealth management revenue growth target for the next three to five years? Thank you.

Thank you, Ling. This is Steven. I'll take the second part of the question first. I think in terms of the integration into the current wealth management, as mentioned in today's remarks and also in our press release, the wealth management has not met its target in the past, whereas we expect for 2021, in line with the insurance brokerage business, we'll have significant growth organically and potentially also looking at opportunities in the market for potential M&As. And in terms with Rich Bride, we expect that it will be collectively integrated into our technological innovation in terms of not just operating licensed brokerage business, which it is licensed in Hong Kong. We feel that it has a significant technological advantage and difference in terms of how it's able to penetrate the B2B market that differentiates itself from what's the current offering out there. And we feel that this digital brokerage business is already well understood and well received by investors in the market. We feel that it will add to a very good part of our portfolio And we've known the team for some time before completing the acquisition, so we think in terms of the business and other aspects of integration, it should go smoothly. Now, in terms of the first part of your question, I think we expect Wishbrite to be contributing and in the normal cost of their business, normal margins. And in fact, we believe that since it is not operating on a purely B2C type business model, where it's more of a B2B2C business model, it should have a higher traditional take rate as compared to other businesses in the market. As an example, we understand that potentially You have certain players in the market that will have to factor in cost of traffic acquisition, whereas in our case, our business will be mainly driven by large corporate customers, in which case, in targeting the users and the players that are customers of this corporate, we think the cost of traffic acquisition will be much lower, therefore giving us a better take rate. At the same time, we feel that it's also able to offer other non-traditional brokerage business to other business, other corporates as well. In that way, it will increase our opportunities to have more income from these sources. Thank you.

Again, if you have a question, please press star, then one. There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Victor Lee for any closing remarks.

Okay, thanks, Dr. Trader. And again, thanks, everyone, for joining today's call. We wish you a good day, and we'll see you next time.