FinVolution Group

Hello, ladies and gentlemen. Thank you for participating in the first quarter 2023 earnings conference call for Finvolution Group. At this time, all participants are in 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 2023 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 email alerts by visiting the IR section of our website at ir.vinpigroup.com. Mr. Tien-Chen Lee, 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 involve 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 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. Tia-Cheng Lee. Please go ahead, sir.

Hello, everyone, and thank you for joining our news call. This is Tia-Cheng Lee, CEO of Evolution. We are happy to speak with you today. The first quarter of 2023 was a challenging one domestically, given the complex microenvironment. The Chinese New Year holiday, coupled with China's reopen post-pandemic, created short-term turbulence throughout the economy. However, despite various headwinds, we delivered another quarter of healthy growth, with the total transaction volume up 9.3%. year-over-year to reach RMB 43.4 billion. And the total outstanding loan balance up 15.8% year-over-year to reach RMB 62.3 billion. We also steadily and successfully executed our local focus global outlook strategy throughout the Pan-Asian markets in which we operate expanding our border base to 28 million cumulatively across China, Indonesia and the Philippines. In line with our mission of leveraging innovative technologies to make financial services better, We have cumulatively invested over RMB 2 billion in technology over the last five years. We remain committed to exploring areas such as data tools, natural language processing, and other AI technologies to improve our data analysis capabilities and drive the holistic digitization of consumer finance across multiple aspects. As such, We have integrated our natural language processing models into our chatbots. And our AI team developed a real-time data platform combined with strong integrated computing capability to support their applications. These generative pre-trained models have created a tremendous opportunity for our business to improve user experience and operational efficiency. We are also pleased to share that Finvolution has officially launched plans to build an open source model platform, aiming to improve the efficiency and effectiveness of our intelligent marketing and customer service operations. We are confident that as we continue to refine and implement natural language processing and speech-related algorithms into our intelligent chatbots, They will greatly improve the conversation experience between Finvolution and our customers. Specifically, we are currently pilotizing the application of strategic PT and other language learning models in our CRM system and smart loan collection system. Further driving digitization process across all of our customer service metrics. Approximately 80% of our customer service inquiries are not solved through chatbots, leading an increase of over 50% in our CRM system efficiency. Supporting financial inclusion is another critical piece of our mission and another area where we can capitalize our cutting-edge proprietary technologies to deliver outstanding results. Thanks to our octopus system for high-quality borrower acquisition, and our magic cube for loan matching. We further reduced our average borrowing rate in the fourth quarter to 22.7%. Furthermore, our magic mirror technology for credit risk assessment updated with revised algorithm preferred improvements across our risk metrics. This accomplishment alongside our acquisition of higher quality borrowers our efficient loan matching process with institutional partners and our consistent, fruitful investment in technology enabled us to gain recognition from our partners and achieve better than expected funding costs, which supported a stable take rate of 3.5% for the quarter. Before we move on to more operational and financial metrics, I would like to share a brief update on our ESG efforts. In addition to our ongoing endeavors to support financial inclusion, we recently established Finvolution's consumer protection initiatives, guided by the high-level goals of be responsible and be compassionate. To help educate our borrowers on their personal finance management, This will gradually improve the quality of our borrowers as well as our customers' financial needs, benefiting our business while creating value for the society. We look forward to reporting more fully on our ESG achievements. This is our 2022 annual ESG reporting in the coming months. In short, we remain convinced that technological innovation will transform the future of consumer finance. Our local focus, global outlook strategy, will guide us as we move confidently through 2023, building on our technological capabilities to expand our customer base and leverage on our strong balance sheet to accelerate the pace of our international expansion. With our mission firmly in mind, we will continue to invent and deploy creative technologies across all aspects of our operations, empowering rapid business growth while enhancing our customers' lives and delivering greater value to our shareholders. With that, I will now turn the call over to our CFO, Jia Yuanxu, who will discuss our operational and financial results for the quarter.

Thank you, Li, and hello, everyone. Welcome to our first quarter 2023 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 Li mentioned, the domestic macro environment continued to present challenges during the first quarter, despite the accurate acceleration in the recovery toward the end of the quarter. reflected by improvements in the purchasing managers index across a variety of industries such as retail, transportation, business service, dining, and tourism. However, the index fell to 49.2 in April, below the threshold that separates construction from expansion, indicating that the economic recovery is still friendly and in an early stage. Sales of larger ticket items such as automobiles, telecommunication equipment, and the real estate also lagged due to the slow recovery of . During the first quarter, the total social financing amount grew by RMB 14.5 trillion. However, Apple's total social financing amount only grew by RMB 1.2 trillion, which was way below market expectations. Although there are some near-term fluctuations in the microdata, the overall recovery trend remains positive. On a brighter note, during the first half of May, we also experienced a sequential increase in our user demand and loan application rate compared to the first quarter and the month of April. As such, our outlook remains cautiously optimistic. We will closely monitor the progress of recovery and expect the growth will accelerate in the second half of 2023. Domestically, our first quarter transaction volume rose year-over-year to RMB 141.8 billion, representing an increase of 8%. Meanwhile, our total outstanding loan balance stands at RMB 161.3 billion, up 15% year-over-year. Given the lingering sluggishness in parts of the domestic economy, we maintained our prudent approach to risk management during the first quarter and expect vintage delinquency to be around 2.3%. The recent day-one delinquency in April also showed improvement to 5.3%. We are also pleased to share that we achieved a strong loan collection recovery rate of 90% in the first quarter. As we deepened our commitment towards financial inclusion through our transaction towards bad quality borrowers and subsequent improvements in borrowing rates, We significantly optimized our funding cost in the first quarter to 6.7% from 7.8% a year ago. We also grow our cumulative number of funding partners to 78 financial institutions while maintaining a stable average ticket size of around 7,900 with an average loan tenure of 8.5 months. Going forward, with our pool of high-quality borrowers, we are confident that we are a threat and area of potential partners. On a related note, we have continued to support small business owners throughout the recent domestic economic downturn. As China's macroeconomy gradually recovered during the first quarter, we noted steady improvements in the segment's risk metrics Hence, we maintained our momentum and served 425,000 small business owners during the quarter, with transaction volume accounting for around 24% of our total origination volume. Now I'd like to share some additional details of our international expansion. Indonesia, our largest overseas market, is still projecting GDP growth of 4.8% in 2023, despite a mild slowdown. The consumer confidence index is high at 100 points, and consumption activities have contributed more than 50% of GDP over the last 10 years. Coupled with cultural, fiscal, and monetary policies from the central banks, we expect Indonesia's domestic consumption to remain strong. We are thrilled by the progress we have made in our overseas markets across multiple operational and financial metrics. Cumulatively, we served 3.7 million borrowers in our overseas markets, while our unique number of borrowers for the quarter increased by 24% year-over-year to 737,000. International loan volume sold by 83% year-over-year during the first quarter to reach RMB 1.57 billion, while standing balance grew 164% year-over-year to RMB 0.95 billion. Alongside the robust operational metrics, international revenue reached RMB 448 million and the increase of 163 year-over-year and contribute around 15% of total revenue in the first quarter. We are encouraged by the pace of expansion in the international markets and expect its revenue contribution to increase to about 20% of revenue for 2023. In Indonesia, we continue to expand our local presence and strengthen relationships with local financial institutions while our partnerships with Bank Jago, Bank Bermuda, and OCBC are finishing. During this quarter, we also established a new cooperation with C-Bank, an Indonesia tech-based banking company whose mission of bettering the lives of consumers and farmers in the region with technology that strongly aligns with our own. The driving relationships have empowered us to increase the proportion of loans funded by local banks in Indonesia to 64% in the first quarter of 2023, compared with just 15% in the same period last year. These achievements carry the effect of the effectiveness of our local workers' global outlook strategy. We are encouraged that Fablution delivered respectable financial performance amid all of the first quarter's challenges. Driven by our consistent investments in technology and our strategic shift toward serving better quality borrowers, net revenues for the first quarter rose to 3.1 billion, up 25% year-over-year. First of all, given our outstanding operational efficiency as well as our prudent attitude towards credit risk assessment and the right bag of provision due to better the expected credit risk performance, net income for the first quarter reached 690 million, up 29% year-over-year and 24% sequentially. Meanwhile, diluted net profit per ADS would be 2.42, an increase of 34% year-over-year and 27% sequentially. Our leverage ratio, which is defined as risk-bearing loans divided by shareholders' equity, remained stable at 4.3 times. indicating the potential for further growth when the economic recovery accelerates during the second half of the year. During such times of uncertainty, our strong balance sheet and liquidity position continues to provide confidence to all our shareholders. In particular, our cash position remains robust with over 7.8 billion of cash and short-term liquidity as of the end of March 2023, representing an increase of 10% sequentially. Along with our fifth consecutive annual dividend, which we issued last quarter, we also continue to return value to our shareholders through share buybacks throughout the year. In the first quarter of 2023, we deployed around US$13.3 million to buy back our shares in the public market. As of March 13, 2023, the company has cumulatively deployed around US$196 million for its share repurchase programs. In total, we have returned US $458 million to our shareholders in the form of dividend and share repurchase programs. Before I conclude my remarks, let me provide some additional color on our business outlook for the second quarter of 2023. Given the unevenness of the domestic economic recovery, we plan to adhere to our optimistic yet prudent approach in the domestic market while pursuing a more aggressive strategy internationally. Despite some uncertainties in the microenvironment, our business trajectory remains solid. The company will continue to closely monitor the situation and reassess our strategy accordingly. With the World Health Organization declaring an end to COVID-19 global health emergency and China's rebounding economy, we are excited and optimistic about our prospects in both our domestic and international markets in the second half of the year. Going forward, we will focus on accelerating our international expansion and driving technological innovation to attract high-quality borrowers and lending partners alike. As a result, we expect our transaction volume in China for the second quarter of 2023 to be around RMB45 billion, representing an increase of around 11% year-over-year. We also expect our transaction volume in international markets for the second quarter to be around 1.7 billion, representing an increase of around 87% year-over-year. With that, I will conclude my prepared remarks. We will now open the call to the crisis chief. 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 touchtone 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. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, we ask that you please kindly repeat your question in English. Your first question comes from Yada Lee with CICC. Please go ahead.

Hello, Mr. Guan. Thank you for giving me this opportunity. I'm Li Haida from Zhongying. Today, I have two questions for Mr. Guan. The first one is about the change in our future pricing. Will there be a certain downfall? In the end, the pricing may stabilize within some range. And in the near future, if we look at it from the financial point of view or from the policy point of view, will there be a certain downfall in pricing? The second question is to ask about the latest change in the delinquency trend based on Vintage. Will there be more stable conditions in the future, or will there still be a larger room for optimization? Then I'll do the translation. Hello, management. This is Yada from CICC, and thanks for taking my question. The first one is about the loan pricing, and I was wondering when the price will be relatively stable, and from the regulation and the funding side, is there any pressure on further decline on pricing lately? And the second question is, what is the trend of our vintage frequency? And if there is still room for significant improvement in the future, that's all. Thank you.

Thank you, Adam. Let me answer your first question. Regarding the pricing, we have already reported to everyone that starting from January 1st this year, the pricing of our own platform's domestic credit business has been below 24. So currently, we are completely in line with the requirements of supervision. Our average pricing for QE is now 22.7 yuan for RRI. We also found that this pricing will actually bring more benefits to the cooperation of our institutions. Our institutions actually have a very high level of customer service for such advantages. So you can see that our capital cost also brings a more obvious optimization. In the future, we will consider this from the price point of view. On the one hand, we are at the cost end, such as capital cost, risk cost, customer cost, and on our own internal operating efficiency, through technology, especially AIGC technology, there is actually a lot of room for further improvement. We will continue to optimize these costs, and we are willing to lend these optimized parts to our borrowers. Because we believe that through more attractive pricing, it can have a more useful effect on high-quality users' acquisition and storage. Higher quality users will also bring us better risk performance, higher pay and better annuality, and thus show higher long-term value. From a long-term perspective, such high-quality users will also further improve our optimization of risk, capital cost, and form a positive cycle. Hi, Yada. Let me do the translation for Alexis.

For the pricing, we have shared that in the previous quarter that all loans originated on our platform in China are already under 24%, which means fully compliant. In the first quarter, the average borrowing rate was 27% and 40%. In this category of better quality borrowers, there are multiple benefits. For example, Our funding partners actually value these high quality customers and there is actually a significant reduction in our funding costs. Funding costs in the first quarter was actually better than expectation. And in the future, there are also opportunities to leverage on technology such as ChatGPT, AIGC to optimize the funding costs. Our intention is to provide the borrowers with more attractive pricing in order to attract higher quality borrowers who are able to have better credit risk performance and they are able to have greater loyalty and have more stickiness on our platforms. This will eventually lead to a positive cycle between the companies and the borrowers. And we expect the borrowing rates in the future is expected to be between the range of IRR 22% to 23%. In the first quarter, the take rate was stabilized at 3.5%. And going forward, we expect take rate to be around the range of 3.3% to 3.5%. I would like to ask you a second question about the latest performance of risk.

The first stage of our risk is still very stable at a level of 2.3. Then, based on the performance of the entire customer group and the external environment, we are also very confident that the entire risk can still be maintained at such a level. Here, I would like to share the final performance of the risk under the epidemic situation last year. From the results of the performance, we found that the final risk performance last year was below 2.3. This result is actually beyond our expectations. During this process, we have done a lot of detailed operations in terms of risk, so we have achieved a very satisfactory result, and the result exceeded expectations. In the past few years, our entire risk performance has been very stable. If we look at it from a long-term perspective, in the past 2 years and 8 seasons, our risk performance has been stable below 2.3. On the other hand, in the past 2 years, the external environment has been very fluctuating. It can be said that we have experienced different cycles, such as the upward cycle and the downward cycle. 所以我们现在应该说我们也可以很自信地说,我们的这个风控的这个能力是经历了这个周期的考验,甚至可以说我们是具备了一定的穿越周期的这样的一个风险的这个能力。 Okay, Yada, let me do the translation. Our vintage delinquency in the first quarter remains stable at 2.3%.

And the current cohort and given the current stable macro situation, we are confident to maintain our vintage delinquency at this level. And I would also like to share the performance of our vintage performance during the lockdown period. And looking back right now, we have realized that the performance of the vintage during the lockdown period was actually better than our expectation at below 2.3%. And over the last consecutive eight quarters, we have managed to keep our vintage delinquency low. And we have done a lot of work such as optimizing various metrics of our operational in order to achieve this level. And we can also say that this validates our prudent attitude towards credit risk assessment and also our proven capabilities to successfully navigate through different economic cycles.

Okay. Is that okay for you?

Thank you. Thank you.

Your next question comes from Alex Yee with UBS. Please go ahead.

I have three questions. The first one is about China's growth. We saw that the return rate of the first quarter has dropped, and the same rate is about 8%. Is this same rate of return rate lower than the 10% to 20% index of the whole year? I don't know. The current situation we see is that the recovery of the first quarter, including the situation in April, is Is it lower than our expectations? And will our next year's exhibition have some negative risks? The second question is about the take rate. First of all, I want to make sure that the 3.5% take rate I just mentioned is not It's just about China, and it doesn't include the international market. Because we see that if we calculate from the report, the rate of RMU seems to have improved. I just want to make sure if it comes from an increase in contribution to international business. Then I want to ask a question about international business. Can you give us some introductions about the situation of your partners? How do I go? How do I go? How do I go? Okay, I'll translate for my question. My first question is on China's growth. So the Q1 low volume shows a current huge decline and a year-on-year growth of around 8%. So these appear to be checking behind about four year guidance of 10 to 20% for domestic business. So would you say the recovery so far you have seen is below your expectation? And is there any downside risk for the four year guidance? And second question is on the tech rate. Could I just confirm that the 3.5% tech rate you mentioned is just for China business only? Because we noticed from your P&L, your revenue tech rate appeared to be showing some Q&Q improvements. So is that coming from the rising contribution from overseas business? And third question is on international business. Can you give us some color about your funding partners? So, for example, how many funding partners you are cooperating and the combined credit line that has been granted to us. Thank you.

Okay, Alex, I will now answer your first question. From the first quarter, let's first look at the changes in the entire environment. In fact, some of the relevant red-light data in April have also come out. The machine is quite obvious. In fact, there is a significant fluctuation in this area. For example, after the rapid recovery of social data in the first quarter, there was a significant decline in April. The recovery of part of the industry is more obvious, but this has something to do with last year's low base. The consumer income index is still below 100, although it has recovered. So it looks like it needs more time to recover. So I think the external environment is actually quite consistent with what was said at the end of April at the Central Political Council meeting. The performance of this data is that the entire economic development is in the trend of recovering, but it is still mainly recovering. The internal power is not strong, and the demand is still insufficient. From our internal data, it is basically the same. Let's look at it from the perspective of user demand. In the first quarter, the number of applications for the Japanese army increased by 2% compared to last year. In the second quarter, the number of applications for the Japanese army increased by 3% compared to last year. In May, the number of applications for the Japanese army increased by 5.4% compared to last year. In comparison, the number of applications for the Japanese military in April and March is almost the same. In May, the number of applications for the Japanese military in April and March is about 1.3. So you can see that there are still some fluctuations between the month and the month, which is also consistent with the external environment. So we think that in general, this year is still a trend that is likely to be stronger in the second half of the year. The recovery may take more time. Our previous guidance was based on the situation in the second half of the year. Okay. Alex, let me do the translation.

From the macro data, you can see that APRIL data has the total social financing data for APRIL has some fluctuations, but was very strong in Q1, and this data was actually slowed down in APRIL. And we can now see that there is some recovery in the consumer confidence index, but still below 100%. And according to the Politburo meeting, it also states that the economy recovery has projected a positive trend, but the internal dynamics and demand is still weak. From internal data perspective, Comparing the borrowed demand data, we can see that the user application rate on a daily basis in the first quarter increased by 2% compared to the same period last year. Entering into the second quarter, user demand has also been increasing steadily with April daily loan application rate increasing by 3% year-over-year. And in the first half of May, this metric further increased by 5.4% on a year-over-year basis. And all these improvements indicate a recovery of consumption loans and higher user demand. We can share that the loan recovery will be weak in the first half, but strong in the second half, which is in line with our guidance.

Your understanding is correct. The take rate that we reported of 3.5 is only for our domestic take rate. The take rate for our international business will be much higher. The third part is about international funds. As I mentioned before, we have already cooperated with three banks in Indonesia. We have added CBank to this fund. CBank is a very well-known technical bank in Indonesia. After working with four companies, we have formed a very good reputation in the Indonesian market. I believe more and more financial institutions will join our team. From last year's 15% to the current 64%, compared to the previous quarter. This data is expected to be improved this year. It is expected that the target will be at a level of 70-80 this year. I don't have the amount of money given by the bank. We can discuss it later. But we haven't used up all the money yet. So it can fully support the development of overseas business.

Alex, let me do the translation for you for this question. With regards to our international funding partners, we have already cooperated with three banks, mainly OCBC, Bank Permata, and Bank Jungle. And the fourth partner, which is CBank, which is a well-known tech bank in the region. And you can see that as we have better quality borrowers, the proportion of loans facilitated by local banks have also increased from 15% in the same period last year to 64% in the first quarter of 2023, and we expect this proportion will continue to increase. We do not have the credit facility numbers online. I will follow up with you later in the offline course.

Okay, Alex, do you have other questions?

Thank you.

Once again, if you want to ask a question, please press star 1 on your touchtone phone. Your next question comes from Frank Chen with Credit Suisse. Please go ahead.

管理层早上好,感谢给我提问的机会。 我对刚才的那个domestic的交易量的增长还有个follow-up。 刚刚管理层提到了这个弱于预期的一个需求, 那么我想从一个供给的角度去讲的话, 这个比较相对比较慢一点的一样, 是不是... It's also because of risk appetite, or when we have credit approval, we still have a relatively high standard to select. In addition, there is a second question about the international market. The international market shows that its take rate may be much higher than the domestic market. My question is whether the take rate can be maintained at a relatively high level in the long term. Thank you, management, for taking my questions. I have two questions. The first one is on a follow-up on the domestic loan volume growth. You mentioned it was due to the softer than expected credit demand, and I'm wondering from a supply perspective, was the relatively mild young year growth also due to the reduced risk appetite and also strengthening screening criteria on credit approval? And the second question was also a follow-up on the take rate of essential markets. The top-line contribution was around 15%, but it only accounts for around 4% loan volume. So obviously it has a high take rate. But can you provide some more color on the sustainability of such high take rate in the long-term in the future? Thank you.

Thank you, Frank. Let me answer your first question. Regarding our risk strategy for domestic customers, I think we are still the same as before, a more prudent strategy. I think the change this year is related to our pricing and the population. Since January 1st, the total price of domestic users has been below 24. You know, different prices and different people mean that the risk strategy is definitely different. So this is our overall risk strategy under the framework. Hello Frank, let me do the translation for you. For our domestic

domestic risk strategies for our borrowers, we are maintaining a prudent strategy. And you should know that it is related to pricing. And all loans since the beginning of this year, all loans are already priced under 24%. Under this strategy, our loan approval rate remains stable without much fluctuation.

The second question is about the take rate overseas. I think the take rate depends on several aspects. One is the price. The other is the performance of capital costs and risks. I think the take rate will fluctuate in the future. However, it is difficult to judge the specific degree and specific amount. On the one hand, the acquisition of high-quality users is definitely a long-term strategy in a different market. We will take the initiative to match the price. Of course, at the moment, all our prices are completely in line with the requirements of supervision. Frank, let me do the translation.

For our international take rate, it mainly depends on three factors, pricing, funding cost, and also risk performance. All these might have some fluctuations, but it is hard to determine right now because we are also in the process of shifting towards better quality borrowers. Take rate can also be optimized when we have better quality borrowers, which in turn leads to better funding costs with better credit risk performance. We believe we are able to adjust accordingly to the situation. And I would like to say, remind that all our pricing right now in the international market is in line with regulations compliance.

Okay, Frank, do you have any other follow-up questions?

That's all. Thank you very much.

Thank you, Frank. Thank you.

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

Hello, thank you all for joining the call today. If you have any further questions, please feel free to contact our IR team. Thank you.

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