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spk00: Good day and thank you for standing by. Welcome to the OneConnect Second Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star zero. I would now like to turn the conference over to your speaker today, Anita Du, Investor Relations Manager. Ma'am, please go ahead.
spk04: Thank you. Thank you, Catherine. Hello, everyone. Welcome to OneConnect's Second Quarter Earnings Court. Joining me on the court are Mr. Ye Wangchun, Chairman and CEO of OneConnect, Mr. Luo Yongcao, CFO, Mr. Michael Fei, CEO of SME Banking, and Mr. Chen Xu Hua, CEO of GarmentO. A few notes before we begin. First, you can download the earnings press release and presentation from the IR website. Second, our remarks today will include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that we make on this court are based on assumptions as of today, and we undertake no obligation to update these statements except as required under applicable law. During this court, we may present both IFRS and non-IFRS financial measures. A discussion on the limitations of non-IFRS measures and a reconciliation of IFRS measures is included in the earnings press release. I will now pass it over to Chairman Ye. His remarks will be in Chinese. Translation in English will follow.
spk01: The company's income has made steady growth, and the loss-loss ratio has continued to be optimized. It is especially noteworthy that the company has firmly established the customer root strategy of the NOS chain, and has achieved good results through a more focused sales and product strategy. In the first half of the year, the net profit ratio was close to that of last year. Hello, everyone.
spk03: Thank you for taking the time to dial into the earnings call of OneConnect. Looking back on the second quarter, the business continued with its internal optimization in response to a rapidly evolving external environment. Our revenue grew steadily and net loss ratio further improved. Pleased to report that OneConnect was able to achieve a good performance by focusing on sales and product strategy, a result of our continuous effort to broaden customer engagement, which was a strategy laid out earlier in the year. The number of premium customers acquired in the first half of the year is already close to last year's total, establishing a solid foundation for our future developments.
spk01: The first half of 2021 is also a half year of rapid changes in the market. However, since 2020, we have predicted that the market will make changes and make major adjustments to the business structure, which greatly reduced the income of the product inside the business. But in the first half of this year, the emergence of a wide range of regulatory regulations and the increase in execution exceeded our expectations at the beginning of the year, especially in Internet marketing. and real-estate data related fields, many financial institutions need to upgrade their original business model. In this process of transformation, our business is inevitably affected, and these impacts may continue in the future. We also need to adjust the performance of the previous year's business.
spk03: The past six months have seen frequent turmoil for the market. Although we saw changes coming as early as 2020 and started to adjust our business structure by lowering revenue from business origination, the introduction of many new regulations and the strengthening of enforcement still took us by surprise. In particular, many financial institutions needed to upgrade their business models in areas relating to online marketing and credit data. Our business unavoidably took a hit amid this shift, and the impact is expected to perpetuate. As a result, it is appropriate that we lower the four-year guidance. 针对这些变化,我们也积极采取措施,对产品进行升级。
spk01: From the past, marketing customer service has been upgraded to provide a comprehensive marketing service solution for financial institutions. From the past, using big data to help attract new customers has been upgraded to help financial institutions improve the business ability of customers and activate and measure customers. From the past, big data service has been upgraded to provide a system plus model plus product
spk03: We are proactively addressing these challenges by upgrading our products. Marketing and customer tools are now a sales solution that empowers financial institutions in the whole process. Especially, we can use existing data within financial institutions to help them boost the activities of existing customer base. Risk management service has been upgraded to an end-to-end solution incorporating system plus models plus products.
spk01: We believe that the growth of Chinese financial technology is still strong. With the implementation of a series of rules and regulations, the future market of financial technology services will be more and more standardized. The space for development in financial technology will be further improved.
spk03: Only in hard times can courage and perseverance be manifested. Only after polishing can a piece of jade be finer. We have strong faith in the bright prospect of China's financial technology. With a series of regulations in place, the fintech service market will be more disciplined, which is good news for OneConnect's potential upside.
spk01: We will follow year-on-year strategy, promote business result adjustment, and product customers to improve the value of labor, optimize the product structure, continue to reduce the income generated by the business, greatly improve the technology capability of the Gamma platform, promote cloud service, wind control operation, and other sustainable income development, deepen the customer demand, from hook products to technical business, the whole platform solution, not only improve customer value, but also increase
spk03: We will remain committed to the strategy of optimizing our business structure, upgrading our products, and enhancing our customer base, thus boosting company value. In terms of optimizing our product structure, revenue contribution from business origination will continue to drop. The technological capability of our Gamma platform will be further boosted to drive recurring revenue from cloud services, risk management, and operation support. In order to deepen customer engagement, we will shift from selling hook products to providing tech plus business support and enabling customers through end-to-end solutions. These efforts collectively aim to increase customer value and acquire more premium customers as well as customers with revenue contribution over 1 million yuan.
spk01: In the first half of the year, we are confident that through our own efforts, we can reduce the impact of the supervision policy and promote the rapid growth of previous year's income, especially the rapid growth of external income. The loss-loss ratio is the same as the double sales improvement.
spk03: For the second half of 2021, we are confident that we can counter some of the regulatory headwinds, deliver fast revenue growth, especially revenue growth in third-party customers, improve net loss ratio by double-digit percentage points, and acquire more premium customers than last year. Thank you for your interest in OneConnect, and we look forward to your continuous support. Thank you.
spk04: Thank you. Thank you, Chairman Ye. Next, our CFO, Mr. Luo Yongcao, will go through the financial results in more detail. Luo Zong, please.
spk06: Thank you, Anita. Good morning, everyone. As Chairman Ye said in his opening speech, the second quarter brought unexpected challenges. It is encouraging to see the team continue with the strategy to reinforce products and sales. Starting with the top line, revenue increased by 25% year-over-year to $968 million in the second quarter. There was some slowdown in growth in the quarter. Let us go through the transaction activity first. which provide a good snapshot of the performance of our business. There are three main indicators that we look at. Retail loan volume, SME loan volume, and auto claims. Retail loan process by our solutions fell 14% year-on-year to 17.7 billion due to a change in regulatory and operating environment for financial institutions. SME loan processed by Conchest had a better quarter, up by 8.4% to $9.1 billion. Most tightening occurred in the area of online consumer activities, promoting some of our customers to move from retail to SME. Demand for auto solutions remained strong. The number of fast claims processed continued to rise by 14% to $1.65 million in the second quarter. By segment, the cloud services platform was the biggest driver in second quarter. It contributed $262 million in revenue, or 27% of total. Launched only a year ago, The business allows us to move from solution level to infrastructure level, strengthening our resilience through economic cycle. Risk management also performed well in the second quarter. Revenue grew by 46% to $106 million, led by fast-claim solution for auto insurance and risk analytics for banking. The diversity of our business is a strong anchor. The growth in cloud and risk management more than offsets the temporary strain experienced in other segments. In terms of size, operation support was the biggest at 28% of total revenue. Revenue in total, however, fell 4.6% year-over-year to 274 million. Implementation revenue also posted a decline year-over-year by 26% to 159 million. The drop in business origination also continued, dragged down by both internal and external headwinds, as we spoke about in previous quarters. Revenue there fell by 20% to 118 million. It was once again the segment that was most affected by the tightening policy, which we will explain in more detail in a moment. The change in business mix also led to a further shift in customer mix. Revenue from PN Group rose 44% to $564 million, mainly benefiting from the rollout of cloud services. At LUFEX, revenue fell 5.9% to 89.5 million. The demand for risk management solutions was strong. However, in terms of business origination, there was a drop as operating environment for internet business has changed. Third-party customers posted revenue growth of 9.4%. to 314 million. We have made good progress in our optimization exercise, cleaning out legacy low-value products. However, third-party customers have gradually helped with the recovery there. They had a strong quarter in risk management as well. Nevertheless, operation support had a difficult quarter as asset monitoring product was affected by regulatory change. We do recognize that the overall revenue growth has been softer, and in the past few months, we have further enhanced our sales management and customer outreach, with more emphasis said to be directed to premium-class customers. Premium customers are those generating over 100,000 in revenue per year. However, the threshold now is low, premium-class customers contribute over one million in revenue per year. The trend is a better reflection of our relationships with key financial institutions, and this shift will allow us to drive the business forward in a more sustainable way. We achieved a good growth of both premium and premium-plus customers in the first half. Year on year, The number of premium customers increased from 346 to 460 as of June 30th. The number of premium plus customers increased from 87 to 113. Moving on to the gross margin, year-over-year, the metric decreased from 38.8% to 34.1%. reflecting the change in mix of solutions. However, some of our new products in the early stage do tend to have lower profitability. Quarter on quarter, the metric was largely stable. Next, I would like to discuss operating expenses. The three main expense items all reported a drop in revenue ratio. Let's look at them one by one. Research and development expenses rose 24% to $359 million as we continue to invest in innovation and new solutions, such as cloud services platform. Even though some products are more mature, upgrade and enhancement are also called for. As a percentage of revenue, the research and development expenses ratio was lower year over year, from 37.3% to 37.1%. In terms of sales and marketing, we spent less in the quarter. Expenses fell 24% year-on-year to 126 million. As a percentage of revenue, the ratio went down from 21.4% to 13%. Due to the regulatory tightening, we have less advertising and promotion activities for this quarter. In terms of general and administrative expenses, it posted a 9% increase to $211 million. As a percentage of revenue, the ratio dropped from 25% to 21.8%. We have been strengthening and at the same time streamlining our management, which helps curb some of the costs. The skill that we have been building also continues to improve operating leverage. With more efficient resource allocation and discipline, operating loss ratio improved from 46.6% to 40.9%. Net loss to shareholders rose slightly from 331 million to 349 million. As a percentage of revenue, the net loss ratio improved by over 6.7 percentage points to 36.1% for the second quarter. It was a challenging quarter. This explains why we have to lower the four-year revenue guidance. We did factor in regulatory tightening in our annual budget. but the extent of policy change and the intensity of policy execution are both beyond our expectation. Our team has been working hard to adjust our operations to address the policy environment and meet the involving needs of our customers. Michael will elaborate more on how we have been addressing these challenges to ensure the continuous performance of our business. Michael, over to you.
spk05: Thank you, Wazong. Now let me offer more cover on how we have been adjusting our operations in response to external winds. Page 15. We have shown how these new regulations affected our business. The new regulations mainly target two areas, namely the use of personal information and the geographical scope of regional banks. Regarding the use of personal information, new regulations prohibit the direct connection of personal data between Internet platforms and the financial institutions. Internet platforms collecting personal data are now required to obtain explicit approval from the users. As a result of this change, banks have to adjust their ways of approaching risk management to ensure compliance with the new regulations. Regarding the geographic limitation on regional banks, they can no longer accept a deposit from or offer loan to clients located in regions where they have no physical branch presence. And also, they cannot offer their term deposit product through third-party internet platforms. These new rules affect new business developments through online channels for these regional banks. With our transaction-based revenue model, we have three major types of products affected by these new regulations. which are the internet marketing related services and the smart marketing solution, the risk management data service and the smart risk management solution, and the asset monitoring service and the smart investment solution. Last year, these products have contributed the revenue over RMB 500 million. We have been working on four different measures to mitigate the impact. If you go to page 16, You can see, first of all, we will help financial institutions to improve their sales management capabilities to best support their sales and business development efforts so that they will be less reliant on internet platforms in customer acquisition. Second, we will help financial institutions to enhance the management of their existing customer base to stimulate cross-selling and upselling. Third, we will upgrade our offering in risk management to provide integrated solutions that offers systems, products, and models. Finally, we will further upgrade our offering of technology infrastructure products, such as core banking systems, AI voice recognition, blockchain, and et cetera. Let me give you some examples. Page 17 is an example of our smart banker product and the smart marketing solutions. Banks adopt this solution will be able to digitalize the whole sales management process and significantly enhance the sales capability of their own realization managers. The unique advantage of WinConnect is that we offer not only the technical tools but also the know-how required to run a business so that the effect of these tools are maximized and the real impact will be delivered. We have shared one example in our quarter one result announcement. At the end of the first half of this year, we have signed seven banks covering over 25,000 negotiation managers. One of our clients has increased their average daily retail volume by 46% since adoption. Next page is about another example of helping our clients to stimulate their existing customer base with our smart customer operation solution. Many banks have a large existing client base. The majority of these clients are dormant or inactive. As new customer acquisition is becoming more and more difficult, the ability to explore existing customer base is becoming more important. Our solution helps banks better understand the needs of these existing customers and find out the best approach to activate them, what rights they prefer, which communication channels they like, what would be the next product to buy, etc. In one of the banks that have adopted our solution, the number of average daily active customers increased 10 times, the number of daily wealth management inquiries increased 30 times, and the wealth management transaction volume increased 20 times. Page 19 is an illustration of our all-round risk management service. Instead of providing only credit data, we offer end-to-end risk management solution, including risk control tools, credit systems, or even application tools. The solution is all-round in another sense that it can support multiple loan products on one platform, secured or unsecured, mortgage or car loans, consumer finance or business loans, The solution can help clients improve efficiency, cutting the long application time required from 15 days to three days. New product launch time is also shortened from four months to one week. Next is about our technology infrastructure product. Through the past years, we have been continuously investing on these technologies and launching new products. Some, such as the Cloud or Smart Voice product, have grown to contribute significant percentage of our growth. Some is being incubated and have obtained initial success, such as core banking, open platform, et cetera. We believe technology is key to our long-term competitiveness, and we will continue to invest. Page 21. Again, we want to reiterate our value proposition. digital transformation for financial institutions.
spk04: Please stay with us for a moment. We are having some technical problems, and we will fix it out as soon as possible. Thank you.
spk05: Sorry, can you hear me?
spk04: Hi, Michael. Hi, Michael, we can hear you. Please go ahead, please. Thank you.
spk05: Okay, sorry. Yeah, there's some technical problems. If we go back to page 21, let me restart this page. Again, we want to reiterate our developer position. Digital transformation for financial institutions is a huge market and only started. We are the leading solution provider in the market, having served over 640 banks, 110 insurance companies, and over 120 plus clients in overseas markets. We are uniquely positioned and we offer not only systems and tools, but also business know-hows on how to best use these systems and tools to ensure a successful digital transformation. Although there are short-term headwinds as a result of tightening regulatory requirements, but we have anticipated these trends and proactively taken measures to upgrade our solutions. The examples we have introduced just now are not developed out of nothing. They have been launched in the past 12 months with tested, successful client cases. This is why we can continue to deliver growth over 30% in both revenue and number of premium clients in the first half of this year, despite all these regulatory impacts. And also, we are confident that in the medium to long term, as the market is becoming more regulated, OneConnect is best positioned to further strengthen our leading position. Lastly, page 22, in summary, we expect that the full-year revenue growth will be no less than the growth rate we achieved in the second quarter of this year. We also stick to our original targets to improve our net loss ratio by double digits. Finally, we will stick to our original strategy of growing premium customers and deepen our wallet share with these premium and premium plus customers. We have achieved a good momentum in developing premium customers in the first half of this year, and we aim to continue that momentum in the second half. Thank you. I will pass it back to Anita.
spk04: Thank you. Thank you, Michael. And sorry, everyone, for the technical issue. Operator, we are ready for the questions. Please open the line, please.
spk00: Okay. Thank you, ma'am. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, you may press the found key. Thank you. Please stand by while we compile the Q&A roster. And speakers, our first question from Hans Chung of KeyBank. You may ask your question.
spk09: Good morning. Thank you for taking my question. So my first question is regarding regulatory changes. And then it's shown there, like, are we competent with the the regulation has been pretty much settled, and then we just need to go through the changes in business model from climate side. And when should we think about the bottom from the year-over-year growth perspective? Which quarter should we think about the bottom? And then the second question is just I think since last quarter, you guys mentioned a lot of the new products. And that's encouraging. And then just wonder, when should we start to see the meaningful contribution from those new products? And then the last question, just kind of high level, just given the changes in regulation and then Are we going to see the difference in business model? Specifically, I actually just want to know whether we will consider maybe subscription-based business model versus our transaction-based. And that's all my question. Thank you.
spk04: Thank you, Han. Thank you for your question. Michael, can you take the first and the third question? And Luo Zong, can you please take the second one? Thank you.
spk05: Yeah. Under regulatory impact, we have just introduced, I think, the regulatory tightening is mainly focused in two areas. One is the utilization of customers' personal information, and second is the geographic scope of the business development for those regional banks. And as we have stated just now, the impact will be mainly on three products. One is the internet marketing services, the asset monitoring services, and digital risk management services. The corresponding revenue for these products for the last year, for 2020, was over RMB 500 million. In the first half of 2021, we see significant impact on the internet marketing product and the asset monitoring product. Actually, without these impacts, the overall revenue growth in the first half of this year will be over what we have achieved the last year. And the third-party revenue growth will be more than 30%. So we anticipate these policy changes will continue to have impact on us for the second half of this year, especially also on the digital risk management product. That is why we actually have adjusted our revenue forecast. We believe the revised forecast has taken into account of the revenue change we have seen and anticipated.
spk06: Okay. For the second question. The revenue contribution of the new products have been affected in our results already because, as I said, we factored in our anticipation of the policy tightening in the beginning of this year already, and we have started to product innovation and upgrade. Just as Michael mentioned in his presentation, the examples of our new solutions have improved to be successful in practice. I think that if we didn't have the new products in place in the second half of the year, our revenue will be affected even more. We cannot see the growth rate we have so far. That's my answer. Thank you.
spk05: Yes, on your third question about the transaction-based revenue model, we know there will be a controversy whether we should go for a subscription-based or transaction-based revenue model. However, we still believe and the transaction-based revenue model can better reflect our overall competitiveness, and we have confidence in the long-term market potential for this type of model. First of all, I think this is our core competitive advantage of combining technology and business, which can give full reflect of our industry experience and business understanding. We adopt this transaction-based revenue model because the market of the digital transformation in China is still huge. We see there's a huge potential in the market. By aligning our revenue with the usage volume, we can enjoy great long-term growth potential. And thirdly, we still believe that in the promotion of SaaS service in Chinese financial institutions, the transaction volume-based revenue model is the most acceptable model for our customers. Of course, given the policy headwind that we face, it does look that we may have a better off this moment with the transaction-based revenue model. But we are aware of this volatility in the performance, and I think we will continue to review product by product and choose the best revenue model for each product.
spk04: Thank you. Thank you, Michael and Wozong, and thank you, Hans, for your questions. Operator, we can move to the next question.
spk00: All right. Thank you, ma'am. Our next question from Carson Liu of HSBC. Your line is open.
spk07: Hey, thank you, management, for taking my questions. My question is more on the cloud service. So now cloud service has accounted for around 27% of the total revenue this quarter. So can management... First question is, can management update us on the progress on promoting or penetrating the cloud service to third-party customers beyond the Ping An Group? And second is, we know that there is... new regulations or potential regulations on the registration of the financial cloud service provider especially on the uh service provider that they need to that financial institutions are can only going forward can only um uh subscribe to the surface that are registered already and then the registration requirement for the us services provider uh seem similarly uh relatively high, the requirements are relatively high. So can management elaborate a little bit on this front, and then what is the impact to our R&D on this, on the cloud service side? Thank you.
spk04: Thank you, Carson. Thank you for your question. Michael and our CEO of GammaO, Chen XuHua, will take your question. Thank you. OK.
spk10: Let me talk about Ergidu. I just mentioned that our third-party customers are in Ergidu. In Ergidu, we have about five new third-party customers.
spk03: You just asked about the third-party customer penetration for cloud service platform in the second quarter. We're happy to report that we've newly added five third-party customers in the second quarter.
spk10: OK. Our main focus now is on the expansion of financial institutions. The financial institutions are still cautious about the financial institutions. Because the entire payment of the financial institutions is based on the amount of money spent. Compared to the third party, the amount of money spent on the financial institutions is still small. So in the future, the financial institutions still need to do their best to expand their external income. This is the first point. The second point is about Thank you.
spk03: As of the end of second quarter, overall we have acquired 36 contracts in total, which is about 60 million yuan in value. So for the second half of the year, we will continue to focus on external expansion. The regulators remain cautious on the financial cloud service model as the model is charging based on usage. Therefore, for third-party customers, the volume is still smaller compared with the volume used by the Ping An Group. That explains the lower revenue contribution from the third-party customers, and that's why we will focus more on external extensions. And you also mentioned about license and registration requirements from the regulators. We are now going through the process of security validation, and we are among the first companies to carry out this process. And we expect that in the second half of this year, we will have clear guidance from the regulators.
spk10: OK. I just mentioned the whole financial crisis. The financial crisis is divided into two parts. The first part is the whole Sibu Commission and the whole Yun'an Province. We have entered the entire inspection stage of the expert in responsibility by August. It is expected that we will submit the first report to the Central Committee in August. We are the first in the financial crisis in the country. The second is the backup of the People's Bank. We will complete the BCTC test in August. This is the first case. In the end of August, we will submit the national certification center for certification. This case may also be the first case. In mid-June, we will carry out the backup of the mutual fund. In terms of the overall situation, in China's financial industry market, we are the first in the financial technology market.
spk03: The regulatory registration is a two-step process. Firstly, we need to finish the security validation at the departmental level, which is expected to wrap up at the end of August. And then after this process, we will continue the validation process at the central level. We expect that in the second half of this year, we will finish the BCPC registration. Ping'an is one of the first companies to finish this. And in mid-September, we believe we will finish the registration for Internet financing. And we are also one of the first companies to complete that as well.
spk10: Okay, from the current situation of Ping'an and Ansheng, we are basically in line with the situation of Ping'an and Ansheng.
spk03: For now, we see that we are in compliance with all the validation requirements, but the process hasn't completely finished, but we remain optimistic. 第三个我们在证监会也在整个云的备案。
spk10: We have finished the cloud infrastructure registration at the SAC, and we are now qualified to provide services to all regulated financial institutions.
spk03: security institutions in China.
spk10: Okay.
spk04: Thank you. Thank you, Carson, for your question. Operator, we can move to next question.
spk00: Sure, ma'am. Our next question from Ethan Wong of CLSA. You may ask your question.
spk09: Thank you. On car management, I have two questions. The first one is on cash. So notice that as a condo material profit and cash balance, so do you feel the need to further raise cash flow in the future? And the second question is on the three mid-term goals we've been mentioning since our IPO. So under the new regulatory environment, do those mid-term goals
spk04: Thank you, Ethan. Luo Zhong will take your first question and Michael will take your second question. Thank you.
spk06: Okay, the first one. In terms of cash, we have cash and equivalent on our book, about $1 billion at the end of the second quarter. And plus, we have short-term investment, financial products, about $2 billion. So in total, we have our cash plus equivalent assets, about $3 billion. And I think it's in a very good position for our operation. So I think there's no need at the end of the second quarter for any reason money issue. If we have any further decisions, we will disclose our decision. Thank you.
spk05: On your second question, we remain committed that in the mid-term, we will have over 1,000 premium customers, and we will be breaking even by the term. That is our commitment during IPO, and we remain committed to that.
spk04: Thank you. Operator, we can move to the next question.
spk00: All right. Thank you, ma'am. Your next question from Piyush says, Malia Mubayi of Goldman Sachs, your line is open.
spk08: Thank you for taking my question. Could you talk through a couple of areas? One is in the cloud business, what sort of gross margins are you running, and what is the implication of the gross margin on the overall profitability of the business and the path to profitability that Michael just described? The second is on the international side. Could you talk about where you are? Can you accelerate that further from where your business is positioned today? And what is the sort of pace of acceleration we can see? And then the third is, with all of the changes we've seen on the regulatory front, if you could look at your business in your 25% growth rate, if you could just spell out how much of that slowdown is regulatory-driven, and how much of it is otherwise in terms of the change in guidance for the year. And how confident are you, my fourth question, on being able to do 25% overall growth rate for the second half of the year based on the guidance that you've just given out? Thank you.
spk04: Thank you, Piyush. Michael, can you take the second question first? And then Luo Zong will take your first question. Thank you.
spk05: Sorry, just to confirm, what is the second question?
spk04: It's about the international business.
spk05: Can we accelerate the growth of the international business? Okay. Yeah. Okay. Yeah. There's a growth of international business everywhere. Our international business, I think there's a two part. One is our business in the Southeast Asian markets. The second is the virtual bank, the PALB. Under our business in Southeast Asian market, it's still very, very strong growth, much, much higher growth than what we have achieved in our domestic market. And we also have a very good customer signing for the first half of this year. Well, unfortunately, the percentage, because we have a small base, so it's still a single-digit percentage in terms of our total revenue contribution, but very, very good, very healthy growth. Now, of course, there are some impacts due to COVID, but I think we are working hard to increase our team in the South Asian market and increase also our product offerings in the market. Another part of the business is our virtual bank, the PLOB. Well, Piyush, you are in Hong Kong. You actually, of course, I think you read all these news about virtual bank in Hong Kong, and the Hong Kong MA also published the financial performance of all these virtual banks. I think our virtual bank, the PLOB, is unique that is focused on SME lending. We see strong momentum of this SME loan growth. And also so far, as we have seen, there's no single overdue loan ever since we launched the business. So we are quite confident about our asset quality, our risk management, and also we are confident about our capability to improve our net interest margin.
spk09: Okay. Thank you.
spk06: Yeah. I'll take the first question on the gross margin. The gross margin dropped from last year's 38% to 34%. I think the drop is due to the new products launches, including the cloud services platform, because all these products are in their early stage, and we have to have more input or expenses to accelerate the revenue of the products. Overall, because you know the... the competitiveness of the cloud business is very intensive. So the gross margin is not high as our other products. But I think with the time we move on, we have our products more and more mature. The profitability will go up gradually. Thank you.
spk08: Does that gross margin improvement come from the mix change or just from cloud becoming more a higher gross margin business with time?
spk06: Yeah, the high margin products, for example, like the risk management, our auto insurance claim solutions,
spk08: The mix will change.
spk04: Thank you, Piyush. Operator?
spk05: I think there's still a question about the growth. I think Piyush asked about the impact of our 25% growth in the second quarter. I think, as I mentioned earlier, there are three major products that are impacted by the new revolution change. The internet marketing-related services, the asset monitoring services, and the risk management data services. And the total revenue of these five products in last year, 2020, was over 500 million. And for the first half of this year, the impact was mainly on the first two. That was the internet marketing services and asset monitoring services. We have a decline of 170 million revenue for the first half of this year as a result of these two products. So if you're taking out of the impact of these two products, our revenue growth for the first half was actually higher than what we have achieved last year. It was also higher than what we have committed earlier this year. And looking into the third and fourth quarter, based on our current understanding of the revenue change, we will see a bigger impact on the third product. I just mentioned that is a credit risk data services. So that is why we have decided to adjust the forecast for the full year. Except for these three products, the other products are actually growing quite good. As you can see, either risk management, operations, as well as the car services, we have seen very good momentum, very, very good growth. That also gives us confidence on our four-year growth momentum.
spk04: Thank you. Thank you, Piyush, for your question. Operator, we will take our last question. Thank you.
spk00: Thank you, ma'am. Our last question from Alex Piao of J.P. Morgan. You may ask your question.
spk09: Thank you, Benjamin, for taking my question. A couple of housekeeping questions. Number one, does the cloud modern structure differ between Pyongyang revenue source and non-Pyongyang revenue source? And then secondly, in terms of non-Pyongyang cloud revenue, or business development, what are the key areas of future revenue potential from industry perspective? Is it more on the banking side, more security, more, for example, funds industry? Thank you.
spk04: Thank you. Michael, thank you, Alex, for your questions. Michael will take both of your questions.
spk05: On the margin structure for Ping An and non-Ping An, they are actually quite similar. Because we have to have an arm's length relationship with all these Ping An transactions. So we have to have this market-oriented pricing for Ping An and non-Ping An customers. Of course, there will be scale impact. Because Ping An is a much larger customer, they have a much larger transaction volume. So if you, on average, I think a pre-transaction basis, the Ping An services will have a better margin compared with those third-party coins who is still in the initial stage, relatively small in terms of transaction volume. And on your question about the growth potential, we believe banking will still be the largest potential area for cloud services, just because banking has over 70% to 80% of the total assets of the China financial industry. So banks will be the largest growth area, opportunity area for cloud services.
spk04: Thank you. Thank you, Michael. I think that sums up our earnings call today. Thank you, everyone, for joining the call today. We look forward to speaking with you again. Thank you.
spk00: This concludes today's conference call. Thank you all for joining. You may now disconnect.
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