FinVolution Group

Hello, ladies and gentlemen. Thank you for participating in the first quarter 2022 earnings conference call for Finvolution Group. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Jimmy Tan, head of investor relations for the company. Jimmy, please go ahead.

Hello everyone and welcome to our first quarter 2022 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company's email alerts by visiting the IR section of our website at ir.cintigroup.com. Mr. Feng Zhang, our Chief Executive Officer, and Mr. Jia Yuan Xu, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session. During this call, we will be referring to several non-GAAP financial measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with US GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, forward-looking statements involved inherent risks and uncertainties. As such, the company results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company's filings 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. Finally, we post a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Feng Zhang. Please go ahead, sir.

Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. Due to the lockdown in Shanghai, our management team are varying from their homes, so please bear with us if we encounter any technical difficulties during the call. We're happy to speak with you today following the successful completion of another strong quarter against multiple high winds. Since March 2022, Shanghai has been under lockdown due to the pandemic and similar lockdowns have been imposed upon additional cities in recent weeks. Furthermore, other fluctuations affecting 2021's macro environment persisted through the first quarter of 2022 and have affected certain aspects of our business operations. However, Our strong technological foundation and strategic transition towards better quality borrowers enable us to flexibly navigate challenges and deliver solid consistent first quarter results, highlighted by our eighth consecutive quarter over quarter growth in total transaction volume, in line with our expectations. We achieved record-setting total transaction volume of IMB 39.7 billion this quarter, representing a year-over-year increase of 48% and a sequential increase of 2%. Now let me share some other major achievements for the first quarter. As we relentlessly and skillfully executed our strategy to acquire better quality borrowers, transaction volume originated for new borrowers to IMB 6.4 billion, an increase of 14% year-over-year. Notably, our total outstanding loan balance also increased to RMB 53.8 billion as of March 31, 2022, representing an increase of 66% year-over-year and 7% sequentially. Thanks to our progressive shift towards better quality borrowers, our ever-evolving credit risk assessment and our self-developed proprietary technologies, such as Platform 9, uh nine three quarters and americ visualize the merrick visualize the loose engines we have stabilized our risk metrics at the moderate low levels while continuously growing our transaction volume platform nine and three quarters is an algorithm learning system which combines automatic model design, deployment, and management into a one-step platform that requires just 100 seconds to acquire relevant resources and implement a new model for credit risk assessment, increasing our efficiency tremendously. MIRAC enables us to swiftly make efficient and appropriate adjustments on complex on complex and iterative operating rules, saving us over 50% in both maintenance costs and time. Supported by our cutting-edge technologies and a prudent management framework, our recent day-one delinquency rate in the first quarter of 2022 further improved to 5.3% from 5.6% in the fourth quarter of 2021. However, since then, due to pandemic-related lockdowns, this metric has increased slightly to 5.5%, but still within expectations. As our loan collection team is largely based out of Shanghai and spread across several cities, our loan collection recovery rate in May remained strong at above 90%. Our deliverance rate below 90 days remained low at 1.56% compared to 1.61% in the previous quarter. Our vintage delinquency rates have remained stable for the past several quarters. However, considering the impact of the COVID resurgence in China, we now expect our vintage delinquency for the first quarter to be around 2.4%. In the meantime, we will continue to closely monitor the risk performance of both existing and newly originated loans. The impact of the pandemic is manageable for us. as we have been implementing preemptive measures, such as strategically reducing loan transactions in riskier regions and tightening the approval rate for sectors such as food and beverage, which have been badly affected by the prolonged lockdown. Our ongoing transaction to better quality customers has been validated by the increased proportion of our category A and B borrowers, which accounted for 58% of our total borrowers in the first quarter compared to just 50% in the same period last year. Furthermore, the percentage of loans facilitated at or below RRR 24% increased to 84% in the first quarter, up from 78% in the previous quarter and from just 14% a year ago. On a separate note, for borrowers who lost their short-term repayment capabilities due to COVID, Our customer service team is providing additional assistance for them to help them tide over this difficult period. We are confident that our industry-leading digital capabilities and in-house developed technologies will empower us to overcome this challenging period while achieving regulatory compliance. While sustaining our strong growth trajectory over the quarter, we also advanced our strategy to optimize our overall funding structure. As we continue to augment and refine our mix of funding partners, we have diversified our platform's funding sources while ensuring they remain stable, secure, and ample. To date, we have cumulatively cooperated with over 60 financial institutions across different provinces and continue to cultivate a robust funding pipeline. Alongside our substantial progress in our consumer finance business, we also maintain a solid growth momentum in our operations aimed at empowering small business owners. During the quarter, we served over 507,000 small business owners across multiple sectors, such as retail, wholesale, and service industries, among others, representing an increase of 56% from the same period last year, while the segment's transaction volume increased 123% year-over-year to a record high of RMB 9.8 billion, contributing 25% of total transaction volume for the quarter. Our delegation to providing small business finance is strongly aligned with the government's objective of promoting quality financing access for SMEs, especially in the aftermath of the global pandemic. Going forward, we will remain focused on our efforts to assist the small business, reaffirming Cleanvolution's commitment as a responsible corporate citizen. Turning now to our international expansion, which continues to gain traction, as in our domestic business, to enhance our business stability, we have strategically implemented multiple measures, such as the transition to better quality borrowers, improving our product mix, offering attractive interest rates, and expanding our partner partners base in the international markets. This approach is bearing fruit. The proportion of better quality borrowers increased to 54% in the first quarter of 2022 from 28% in the same period last year. With the transition to better quality borrowers, we have also further strengthened our institutional funding base in the region. And we are confident of securing additional funding as our business grows. With the COVID-19 situation largely under control in Southeast Asia, our transaction volume reached RMB 0.86 billion in our international markets during the first quarter of 2022, representing an increase of 13% year-over-year. Of particular note, outstanding loan balance for our international markets totaled RMB 0.36 billion, representing an increase of 44% year-over-year and 9% sequentially. We will continue to cultivate our partnerships with different players in the region and introduce new products and services to improve our offering mix. We are confident that these efforts will support our goal of becoming one of the leading players in the region. Last but not least, I'd like to provide an update on our ESG performance, which is an important part of our goals and long-term value creation philosophy. This quarter's lockdown in Shanghai presents enormous challenges as well as opportunities for our team to develop effective ESG solutions. I'm incredibly proud to report that our entire organization stepped up to meet and overcome these challenges with creativity, determination, and grace. Our IT department quickly provided systems and software solutions to allow our employees to work from home to minimize work disruptions. and our procurement team and administrative team are working relentlessly to obtain supplies and provide ongoing assistance for our employees and partners who are immobilized by the lockdown. On a community level, to assist local authorities, our IT department developed a notification system to provide a timely pandemic related updates for residents in certain areas. Our employees also procured food supplies for volunteers stationed in the Songjiang district. Finally, we reported last quarter that we received a low-risk ESG rating from Synalytics, a leading independent global provider in ESG research, ratings, and data. Additional independent platforms such as Refinitiv and ESG Enterprise have also included us in their ratings, providing our stakeholders with even greater insight into our ESG goals and accomplishments. We firmly believe that our long-term strategic plan, including financial, technological, and ESG goals, will lead Finvolution to its next phase of growth and prosperity. As always, our efforts are inspired by our mission of leveraging innovative tech to make financial services better. In summary, our excellent performance in the first quarter of 2022 underscores our strength and stability, as well as our team's ability to overcome any challenges. Taken together, our high-quality customer base, outstanding credit risk management system, and a strong overall execution form form a firm foundation that will empower us to drive sustainable and quality growth in the long run and further strengthen our leadership position in the industry. Going forward, We will remain dedicated to acquire fair quality customers, both domestically and internationally, while leveraging our technological capabilities to further refine our credit risk assessment and management framework to optimize our product mix. With these advantages, we believe that we are well positioned to capitalize on the massive opportunities ahead and create great value for our customers, shareholders, and all of our stakeholders. With that, I will now turn the call over to our CFO, Zhao Yunxi, who will discuss our financial results for the quarter.

Thank you, Hong, and hello everyone. Welcome to our first quarter 2022 earnings call. In the interest of time, I will not go through all of the financial items on this call. Please refer to our earnings release for further details. As Hong mentioned, We're encouraged that despite multiple challenges in the first quarter, we still achieved quarterly transaction volume goals for the eighth consecutive quarter while maintaining our risk metrics at a relatively stable level. Our transaction to better quality borrowers coupled with strengthened relationships with funding partners and a consistent technological enhancement. The loan approval rate for our funding partners go to 76% in March compared to 62% in the same period last year. Our pipeline of potential partners remains strong, and we are confident to achieve meaningful improvement in our funding costs in the near future. Driven by our consistent efforts in research and development, we have continuously enhanced our chain of technologies throughout our business operations, including customer acquisition and credit risk assessment, among other areas. These efforts have been validated by multiple improvements across our operational metrics. Navigating this trend, our net revenues for the fourth quarter rose to only $2.4 billion, an increase of 16% year-over-year. Even more encouragingly, we also delivered a strong non-GAAP operating profit of RMB 6.2 million and maintained a substantial balance sheet with RMB 10.8 billion in total shareholders' equity. During the first quarter, our average borrowing cost remained stable at around 24.3% compared with 26.7%. in the same period last year. On particular note, nearly all loans originated for our new borrowers are under 24%, reflecting our ongoing commitment to financial inclusion and our growing ability to align with regulatory directives. We maintained our tick rate for the quarter at a stable pace of 3.9%. Together with our partners' support and our consistent effort in optimizing operation efficiency, we are confident that we can continue to deliver solid results going forward. With the population of our capital light model stabilizing at around 21%, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, is made stable at 4.1 times. Our unrestricted cash and short-term liquidity position increased to $6.3 billion compared with $5.6 billion in the previous quarter, representing a significant increase of 13% for demonstrating the robustness of our balance sheet. During the first quarter, we continued to target higher quality borrowers, both in the domestic and international markets, with attractive borrowing rates as part of our ongoing strategic transactions. Our customer acquisition channels remained diversified across online and offline sources ranging from online information feeds, internet search engines, and mobile app stores, to customer referrals and our strong offline director sales team, supporting our healthy and stable customer acquisition costs. Apart from our annual dividend policy, we have also been returning value to our shareholders in the form of share repurchase. Between January 2022 and April 2022, we deployed about USD 15 million to buy back our shares in the public market Since we initiated our share repurchase program in 2018, we have cumulatively deployed USD 147 million, representing 81% of our total share repurchase program. Before I conclude my remarks, let me provide some additional color on our business outlook for 2022. Despite the recurring COVID-19 lockdown in the parts of China and a more challenging macro environment, we are still confident that world business operations will continue to gain momentum both domestically and internationally. As a result, we now expect our transaction volume in the second quarter to be in the range of $40 billion to $41 billion. representing an increase of around 20% to 23% year-over-year. Based on our current assessment, I would like to reiterate our full year guidance for 2022 remain unchanged. With that, I will conclude my prepared remarks. We will now open the call to questions.

Operator, please continue. 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. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. For the benefit of all participants on today's call, if you wish to ask your question in Spanish or in Chinese, we ask that you please kindly repeat your question in English. At this time, we will pause momentarily to assemble our roster. And our first question will come from Yada Li with CICC. Please go ahead.

Okay. Then I'll do the translation part. So the first one is on the funding side. So due to the limited supply, our funding costs actually increased in the fourth quarter last year. And are there any improvement this quarter? And what can we expect to see? And what is the trend of the funding costs in the future? And the second one is about our international business. So could you please elaborate more on the progress of our product development and also on the optimization of our client base? Thanks.

Thank you, Adam. The first question is about our capital cost. In the first quarter, our all-in capital cost was about 7.8%. And indeed, this year we will see a very obvious trend, which is that the market is still very popular with relatively high-quality assets. The company has actually done a lot of work in this regard, and has also achieved very good progress. We expect that in the following few seasons, there will be a more obvious trend of such a decline in capital costs. We expect that in the year, our capital costs may have a drop of 30 to 50 BP. In addition to cost, I think we As mentioned earlier, in our cooperation with the institutions, our pass rate has also been significantly improved. Although this indicator is not a particularly significant financial indicator, it is very important in terms of our overall operating efficiency. This indicator is about 60 from the original, and we have now mentioned 76. This is also very helpful for our operating efficiency. So in general, this year, our cooperation with the institutions This is a big improvement compared to the past.

This is Jimmy. Let me do the translation for you. Our all-in funding cost in the first quarter was around 7.8%. And going forward, the industry will see a significant demand for better quality borrowers this year. And during the next few quarters, we are very confident that our funding costs will improve by between 30 to 50%. And apart from the funding cost trend, we also see that our approval rates from our funding partners has been improved greatly. And this has actually greatly improved our operating efficiency. This metric actually improved from 60% to 76% on a year-on-year basis.

And then the second question is about our international business situation. We have already shared with you from the third quarter of last year. We have been doing transformation in Southeast Asia since the second half of last year. Our goal is to make a better consumer group. This is because we have also experienced it in China. So this is a very important and sustainable business strategy. Our plan this year is to use this transformation as the main goal to achieve this goal. This is the whole year's plan. From the whole year's plan, the overall transformation result is clearly better than expected. You can also see the data. Our international sales volume increased by 13% from last year's 7.6 billion to the current 8.6 billion. DaiHuan increased from 2.51% last year to 44% to 3.61%. At the same time, we have a very obvious increase in the volume of the whole high-quality group. Our high-quality customers have increased from less than 30% in a quarter to more than 50% in this quarter. Another thing you can see is that in the classification of our products, the product with a split period represents the high-quality users. This ratio has increased from 22% in the same period last year to 55% in this quarter. So these indicators can actually reflect that while our entire international business is growing, our customer quality, our business quality has been greatly improved.

Yeah, this is Jimmy again. Let me do the translation for you. For our international business, during the second half of 2021, we have been transitioning to better quality borrowers, just like what we have been doing in China. And we have actually experienced better than expectation progress in the transition to better quality borrowers. You can actually see that on a year-over-year basis, our transaction volume grew by 13% from RMB 760 million to RMB 860 million. And on particular note, our outstanding loan balance grew by 44% from RMB $250 million to RMB $360 million. And at the same time, the proportion of our better quality customers also experienced improvement and grew to 54% in the first quarter of 2022 from just 28% in the same period last year. And lastly, you can also see that from the proportion of our installment loans, This proportion actually grew to 55% in the first quarter from the same period of 22% last year.

Our next question will come from Frank Chang with Credit Suisse. Please go ahead.

感谢管理层给我提问的机会。 我有两个很快的问题。 首先第一个是 on credit quality 的。 我们看到 19-day plus 的预期率 在 EQ 还是有一些上升。 能否请管理层给我们更多的 some of the early risk indicators of the second quarter to the present. And for the recent few months, we have seen the situation of COVID. What adjustments has the company made to better control the risk level? In addition, I would like to ask Guan Yicheng to give us this. Since April and May, and including the second half of the year, if we gradually recover from this epidemic, Thank you, management, for giving me the opportunity to ask questions. I have two questions. The first is on credit quality. We see that 19-day plus delinquency continues to rise slightly in the first quarter. Can management give more color on early risk indicators in second quarter to date? What kind of adjustments have companies done for better risk management? And what's your outlook going forward for the second quarter as well as the second half of this year as we gradually recover from COVID? My second question is a quick follow-up on the international markets. For international markets, what kind of growth in terms of volume and earnings contribution should we expect for this year? Thank you.

some data related to risk. From the performance of Vintage in the first quarter, we are almost at 2.4%. Compared to the past 2.3%, there will probably be a 5% fluctuation. As for the amount of these assets, we think the fluctuation is about 5% to 10%. So our overall portfolio, from the point of view of Vintage's final expectations, should be able to control within 2.5%. This is a comparison of the same period as the Wuhan epidemic in 2020. We feel that at the same time, our overall fluctuation situation is much better than in 2020. Because in 2020, our risk fluctuation exceeded 10%. The reason for this is that the ratio of the high-quality population, the strategy, actually has a very obvious effect. The high-quality population has grown from 50% in the same year last year to nearly 70% now. So from the current point of view, our overall risk performance has been affected, but the overall situation has been controlled. From our relatively close, for example, DeWen's indicator, Hi Frank, this is Jimmy.

Let me do the translation for Alex. Okay, I know the market is very concerned about the impact of the pandemic. And we have also shared some credit-based data earlier. For example, our vintage delinquency in the first quarter is around 2.4%. And this is about 5% fluctuation compared to the previous several quarters. And on an existing loan balance, the credit performance is expected to increase by 5% to 10%. And if you compare the situation today with the Wuhan lockdown back in 2020, the situation today is actually a lot better because the fluctuation back then was more than 10%. This is because of the transition to better quality borrowers strategy which we have been adopting over the last few years. And if you take a look today, the proportion of our better quality borrowers in China actually in the first quarter was around 70% compared to around 50% back then. And let me now talk about our early day delinquency metrics. Our day one delinquency was about 5.3% in the first quarter versus 5.6% in the previous quarter. However, due to the impact of the pandemic, our day one delinquency increased to 5.5% in main, which is still within our estimation.

And then the second question is about the development of our own internationalization. As I just mentioned, we were looking at this year's internationalization business last year. We actually did not set a particularly aggressive goal, because our focus is on the transformation of such a business. From the current progress, it is true that the transformation effect is better than expected. So now we are also re-examining our business rhythm. So now it may be too early to talk about specific numbers. We can talk about it in the following few seasons. Then we will share the situation regarding growth and profit. But it is very certain that we are particularly optimistic about the internationalization of this business. Hi Frank, let me do the translation again.

For our international business, we didn't set an aggressive loan volume growth target because our strategy this year is to transit to better quality borrowers. And based on the current data, the transition progress is better than expectation. And we have a very strong confidence that our growth momentum for our international business will continue in the second half of the year. And also, this is able to diversify away from the risks that we face in China, like the lockdown in different cities in China.

Okay, let's see if you have any other questions.

Okay, thank you very much. Thank you.

Thank you.

Our next question will come from Alex Yee with UBS. Please go ahead.

Good morning. Thank you for giving me the opportunity to ask a question. I have two questions. The first one is about pricing. We see that the average price of Q1 is 24.3. The three technologies are even. I would like to ask, after the deadline in June, will the price of QE continue to go down, or will it remain stable? Will 100% of the loans be within 24% of the price? Then, regarding the indication of the take rate, what is the comparison between the take rate and QE that we expect throughout the year? The second question is about what we see from here. the total amount of loan application. Compared to the same period last year, there is a significant decline. Because of the repeated epidemic and the lockdown, the consumer's expectations may become worse and the overall situation becomes more conservative. Even if the lockdown is lifted later, they may not be willing to borrow money. For example, will the addressable market be affected? So I have two questions. First one is on the pricing. So we have an average loan pricing of 24.3% in Q1, which is spread from previous quarter. So as we are approaching the June deadline for the 24% cap, what's the plan ahead on complying to that, and what's the outlook on loan pricing? And what is the implication on your tech rate? How do you expect your for your tech rate to trend compared to Q1. And my second question is on your loan application. So how does your overall loan application compare to the same period last year? Do you see a visible decline? So are you concerned that due to the on and off COVID resurgence, which could lead to borrowers becoming more conservative in their borrowing behaviors, And how would that affect your future growth process? Thank you.

Thank you, Alex. First, about pricing. Our first quarter is 24.3%. We should say that since the fourth quarter last year, we have been fully prepared to meet the requirements of the 24th quarter. Because in the fourth quarter last year, we almost reached 80% of the overall price. In the first quarter, we have reached 84%. So we have already, from the business strategy, the customer's budget, including some financial impact, we have actually all been ready. From the strategy point of view, we still hope to maintain a certain flexibility and flexibility in terms of pricing. So for this year's overall growth, we will also include our organization's some feedback, some demand from the market. From what we can see now, the whole pricing will be relatively stable this year. We estimate that the overall pricing for the second half of this year will be around $24. So this is what we estimate the pricing to be like. For Techway, we estimated it to be $13.9 per quarter. um um

Alex, this is Jimmy. Let me do the translation. Our take rate in the first quarter, sorry, our pricing in the first quarter was 24.3%. And please bear in mind that in the fourth quarter of last year, our proportion of loans under IRR24 was 80%. And during the first quarter of 2021, this proportion further increased to 84%. We believe we are ready in terms of customer preparation, financial preparation, and regulations compliance preparation. Going forward, we will maintain certain flexibility on pricing and we believe that in the second half of the year, our pricing will still be around 24%. Our take rate in the first quarter was 3.9%. As we have stated earlier, we expect funding costs will improve in the second half of the year, As our risk has also some fluctuation, this will be offset and our take rate will likely be maintained at this level.

Alex, because the signal is not very good, do you have another question? There is one that I didn't hear very clearly. Can you repeat it? Okay, it's about the loan application amount we see here.

Right.

This does have some impact. If we look at the activity of our app users, we can see that the number doesn't have much impact. From the data, the impact should be less than 5%. From the future, Let me do the translation.

There is some impact on our activeness as it has some fluctuations, but this impact is less than 5%. And we also noticed that China has introduced positive policies and measures to boost consumer confidence. And thus, we are adopting a cautiously optimistic attitude going forward.

Okay, Alex, do you have any other questions?

Okay, I have no questions. Thank you. That's all for me.

Thank you, Alex. As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Hello, everyone. Thank you once again for joining us today. If you have any further questions, please feel free to contact Team Pollution's investor teams. Thank you so much.

This concludes this conference call. You may now disconnect your line. Thank you.