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Qudian Inc. American Depositary Shares, each representing one Class A Ordinary Share
Q1 2021 Earnings Conference Call
6/15/2021
spk06: Hello, ladies and gentlemen. It's nice to be standing by for QDS Incorporated's first quarter of 2021 earnings conference call. 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 it all over to our host from QDN. Please go ahead.
spk01: Hello, everyone, and welcome to QDS first quarter 2021 earnings conference call. The company's results were issued via news services earlier today and were posted online. You can download the earnings free release and sign up for the company's distribution list by visiting our website at ir.qdm.com. Mr. Mingluo, our founder, chairman, and chief executive officer, and Ms. Cici Zhu, our VP of investor relations, will start the call with prepared remarks, and then we will open the call to Q&A. 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 Security Policy Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's 20-app, as spelled with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that CDN's earnings-free release and this conference call includes discussion of unaudited-scale financial information, as well as unaudited non-GAAP financial measures. Previous brief release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. We also posted a slide presentation on our IRR website providing details on our results in the quarter. We will reference those results in our prepared remarks, but will not refer to specific slides during our discussion. I will now turn the call over to our CEO, Ning Luo. Please go ahead.
spk04: Hello everyone, I would like to thank you all for joining us on today's call. We kicked off 2021 with a solid first quarter. We greatly improved the quality of our assets while maintaining prudent operations of our cash credit business in light of the ongoing shift in online lending regulations, notably We record a net profit of 478 million RMB for the first quarter compared to a loss in the first quarter last year. Our net assets increased to 12.4 billion RMB and we had approximately 7.3 billion RMB of cash. and cash equivalents and short-term investments at the end of the first quarter. Our strong balance sheet allows us enough funding to invest in new business initiatives which we believe will increase long-term shareholder value. We are very excited about the meaningful progress we have made with our early childhood education business, Wanli Mu Kids. In January, we launched our very first Wanli Mu Kids Center in Xiahen, where our company is headquartered. This center occupies approximately 4,600 square meters. Early feedback has been positive. and we are for going ahead with our plans to expand our national wild footprint in China's large underdeveloped early childhood extracurricular enrichment market. Our mission for Wan Limu Kids Club is to help Chinese kids grow up happy and healthy. We hope to help kids explore the potential in sports, art, and music, truthfully and freely, while also helping children build healthy bodies and minds parallelly. We firmly believe in the great potential of each child For young kids in China, we estimate that there are currently about 160 million kids between the age of 0 and 9 in China, and we expect the penetration rate of HCL enrichment services as well as household spending in this area will grow. One of the key business in the world to define kids special curriculum education. We consistently strive to differentiate ourselves from others and we believe one of the key value proposition for parents and kids is very clear. Firstly, we guarantee a health-free refund policy as opposed to non-refundable lump sum prepayments required by many other institutions. Secondly, we provide comprehensive program offerings in one place to optimal prices, saving parents the time and money spent in taking kids to different places. Thirdly, we have well-trained instructors in each of our centers with standardized teaching procedures and we also have a centralized teaching, research, and development team. Last but not least, we provide state-of-the-art high-tech facilities to create a safe and comfortable environment in each center. With our customer-mover advantages, we built strong energy barriers in two aspects, location and talent. There are limited good and convenient locations near core urban residential areas. And once we secure the right of use at these locations, others cannot easily find a similar location there. On the other hand, as talents are at the core of this business, we have attracted over 50 excellent entrepreneurs who have run education business with annual revenue of over 100 million RMB to join us as equity partners. Specifically, our equity partners will actively participate in our frontline business operations. Our senior management team and employees are highly motivated and share the same vision, adding critical value to the success of this new business. In conclusion, as we venture further into 2021, we remain cautious in our credit loan business operations. striving to develop our early childhood education business. I'm also happy to share with you that we had our internal kickoff meeting today attended by over 800 employees and the core management team. Marking Wanli Mu-Ki's official move to the national stage for Xiamen Backed by our shared vision, we look forward to joining hands with our core management team and employees to build a nationwide extra curricular platform in China to help tens of millions of kids grow up happy and healthy. Now, I would like to turn the call over to Sissi for more details. on our results.
spk05: Thank you, Ming. And good morning and good evening, everyone. As Ming mentioned, in order to navigate evolving market dynamics, we maintain our conservative approach to operate our loan business by rigorously assessing credit risk of new transactions. Consequently, we experience an 8.4% decrease in transaction volume for our loan book business. for the first quarter of 2021 compared with the previous quarter. Our strict credit approval standards continue to pay off during the first quarter with a further sequential decrease in our delinquencies. In particular, our D1 delinquency rate for loan book business fell to less than 5% at the end of the first quarter of 2021, a normal level in our operating history. Moreover, our balance sheet remains strong and healthy enabling us to safeguard the interest of our shareholders. Additionally, more than 98% of our outstanding loans were funded by our own balance sheet loan transactions, and our M1-plus delinquency coverage ratio remained at 2.7 times. Echoing Ming on our early childhood quality education business, we are actively progressing toward our goal of becoming a comprehensive one-stop service provider for early childhood extracurricular enrichment programs. Our Wani Mukis project offers numerous top quality sports, arts, music enrichment programs for children from ages zero to nine, such as swimming, basketball, football, and dancing, et cetera. Following the effective opening and operation of the Xiamen Tai Zi Hui Activity Center, our first in-devil in the early childhood education market, we are designing more than 80 additional activity centers to replicate its success. Boasting solid financial strength and a superior team of education industry veterans, we plan to broaden our early childhood education services across the country with a mission to help Chinese children grow up happy and healthy. The incremental spending in our Wan Limu Kids business may put pressure on our profitability in the near term, but we believe we are well equipped to tap into the opportunities in the fast-growing extracurricular enrichment market in China. Following the completion of the loss-making ramp-up period, we anticipate that the uneconomics or UE for the Wan Limu Kids club business will be very attractive. The UE will be superior to that of many other offline businesses because, number one, being large long-term traffic generating tenants, we can enjoy lower rents compared with smaller institutions. Number two, we can enjoy lower user acquisition costs due to the variety of SKUs being offered and because of strong word-of-mouth referrals. That's evidenced by the fact but over 50% of our traffic for the first center were from referrals and natural walking. Having said that, we have a concrete plan to expand across China this year and hope our investors could stay with us and enjoy the great journey ahead. Going forward, we will keep a close eye on regulations in the online lending industry and proactively take adaptive measures in the rapidly changing environment. supported by our adequate cash resources and strong financial position, we believe we can continue to grow our overall business and deliver sustainable value to our shareholders over the long term. Now let me share with you some key financial results. In the interest of time, I will not go over them line by line. For a more detailed discussion of our first quarter 2021 results, please refer to our earnings press release. Our total revenues were $515.7 million or $78.7 million representing a decrease from $958 million for the first quarter of 2020. Our financing income totalled $362 million representing a decrease from the RMB $623 million for the first quarter last year as a result of the decrease in the average loan balance. Loan facilitation income and other related income decreased by 97% to RMB $12 million from RMB $422 million for the first quarter of 2020 as a result of the reduction in transaction volume of all balance sheet loans during this quarter. Our transaction services fee and other related income increased to maybe $50.6 million from a loss of maybe $150 million for the first quarter last year, mainly as a result of the reassessment of variable consideration. Sales income and others increased to RMB 62.5 million from RMB 7.1 million for the first quarter of 2020, mainly due to the sales related to the one e-commerce platform. Our sales commission fee decreased by 68% to RMB 10.7 million from RMB 33.7 million for the first quarter of 2020 due to the decrease in the amount of merchandise credit transactions. Our total operating cost expenses also decreased by 97% to $63.3 million from $2 billion for the first quarter last year. Our cost of revenues decreased by 4.8% to $91 million from $95.6 million for the first quarter last year, primarily due to the decrease in funding costs associated with the on-balance loan book business. partially offset by the increase in cost of goods sold related to Wally Mui e-commerce platform. Sales and marketing expenses decreased by 36% to RMB 37.6 million from RMB 58.8 million for the first quarter of last year, primarily due to the decrease in third-party service fees and marketing promotional expenses. General and administrative expenses decreased by 12.9% to RMB 66.7 million from RMB 76.6 million for the first quarter of 2020 as a result of the decrease in staff salaries. Research and development expenses decreased by 28.4% to RMB 39.2 million from RMB 54.7 million for the first quarter of 2020 as a result of the decrease in staff salaries. Our provision for receivables and other assets was a reversal of RMB 106.8 million compared to a loss of RMB 1.1 billion for the first quarter last year, mainly due to the decrease in past due on balance sheet outstanding principal receivables compared to the first quarter last year. Our income from operations was RMB 464.8 million as compared to a loss of RMB 961.1 million for the first quarter of 2020. Our net income attributable to 3DS shareholders was maybe 478.4 million or maybe 1.81 per diluted ADF. Our non-GAAP net income attributable to 3DS shareholders was maybe 488.3 million or maybe 1.85 per diluted ADF. With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue. Thanks, Annie.
spk06: Thank you. Yes, as a reminder, to ask a question, you need to press star 1 on your telephone. And to withdraw your question, please press the pound or hash key. And please stand by while we compile the Q&A roster. And for the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Once again, to ask a question, please press star 1 on your telephone. Yes. Thank you. Our first question is from the line of Jackie Luo of China Renaissance. Your line is open. Please go ahead.
spk02: Thank you, Director Guan, for giving me the opportunity. I also want to congratulate the company on achieving a wonderful performance. I have two questions here. The first one is about our credit business. We also saw that the level of our risk continues to decline year-to-date. I would like to ask the management what is the expectation of our loan amount in the future? In addition, my understanding is that our current unbalanced rate is mainly used in the mode of lending loans. After this, will there be some monitoring pressure? Will we consider switching to a straight-line mode to carry out credit business? The second question is about our new business, One Limit Moved. Just now, I mentioned that what we are seeing now The first one in Xiamen, the One Remote Kit, is actually a very good model. I would like to ask the management team if they can help us figure out the current economic model of the One Remote Kit. As I mentioned, we will increase the investment in the future. We have a plan to expand to the whole country. So let me translate my questions. So thanks for taking my questions and congrats for the solid results. I have two questions. Number one is about our credit business. We observed that our risk level continued to decrease year to date. So just want to check what is our loan balance outlook for this year. And in terms of the credit business model, my understanding is we continue to use the entrusted lending model for our unbalanced sheet loans. Do we see any regulatory pressure for this type of model? Are we planning to switch to, let's say, licensed lending, for example, using the microloan license? And second question is about our new business, Wanling Wu Kids. So just trying to understand the unique economics for this new business can give us some details of breakdown. Also, we mentioned we will increase the spending for this new business in terms of the nationwide expansion. So what will be the investment scale and pace going forward? Thank you.
spk05: Thank you, Jackie. I'm happy to see you on the call. So let me answer your questions one by one. Regarding our credit business, as we also observed that our B1 delinquency rate as well as our vintage charts have been improving over the past quarters. But in the long-term future, we believe, although the demand for small credit will always exist, however, in China, such demand in the long-term, we believe, will be highly likely served by large financial institutions as opposed to non-government-backed technology companies like us. So the regulation risk in this sector should not be ignored, as we observe that the tones from regulators have been on the tightening side. So in our point of view, including things like interest rate cap, leverage restriction, information disclosure requirements, credit guarantee restrictions, et cetera, there were not many positive updates in the regulation in the first quarter or the second quarter. As such, we chose to maintain our prudent strategy and which means we will maintain our similar credit assessment, rigorously credit assessment rules and similar volumes. However, our loan balance for our loan book business will still be decreasing in the second quarter. With regard to the own balance sheet loan channels from the interested loan model to other regulated models, license models, yes, we have already changed that. to license charts. So the risks pending the interest to loan model is not with us. Regarding your second question on our UEs, we expect the UEs to be superior to that of many of other offline businesses. Although it is our company's policy not to give guidance since 2019, We surely will increase some KPACs for the renovation of activity centers and operational expenses for staff costs and rents. The unit economics, although I couldn't give out concrete guidance, I could help guide the market to think and make reference to other offline businesses. RUE will be superior to many traditional education businesses as we do not need to incur abnormally high user acquisition costs or high rents. And also, our UE could be a bit similar to that of offline catering business as well, just need to take out the large amount of food and consumable expenses of the offline catering business. So the UE will be very attractive. And with regard to our CAPEX and the REMPOP speed, As we mentioned, Nicole, and in our presentation, we currently have over 80 centers in the designing process and the renovation process. So we expect to do a big ramp up and expansion nationwide this year. There will be certainly CAPEX expenditures, but we expect in the steady state, RUE will be very attractive. Thank you, Jackie.
spk02: Thank you, Cece. Claire.
spk06: Thank you. Once again, for those who wish to ask a question, please press star 1 on your telephones and wait for your name to be announced. For your questions, please press star 1 on your telephone keypads. Our next question is from the line of Steve Chan of Haipao International. Please go ahead. The line is open.
spk03: Steve Chan, Haipao International. From the mid-term perspective, we will slowly move from the rental business to the education business. This is the first thing. The second thing is to understand from the accounting perspective, Now, the income of our kids in Wan Limu, and the budget, which item will be included? In the future, for example, we mentioned that we may build about 80 new centers. In the future, for example, in two to three years, Let me translate into English. I have two questions. First of all, I think Cici just mentioned about the loan balance of the credit business will likely to be reduced in Q2, and we will maintain a conservative approach in the credit business. So does that imply that in the medium term, QDN are likely to gradually transform from a loan facilitation or credit lending business to U.S. more like an education, early education company. That's the first question. And secondly, could you give us some, secondly, two sub-questions. One, from the accounting point of view, where did you put the revenue and expenses of wanting new kids in the P&L account? And do you have any target revenue or target return for this business, say, in three years' time. Thanks.
spk05: Thank you, Steven. Happy to meet you over the line again. So let me address your questions one by one. First of all, our balance swapping and rate. So as a matter of fact, the unique knowledge of our credit business is still very profitable. We charge at 36% annual interest rate. And our annualized delinquency default rate is less than 10%. So this business is still very lucrative. So as long as we're making profit on this business, we will keep a similar level of loan volume and similar level of risk assessment procedures. In the mid to long term, from an investment point of view, as we assume today is an investor who invests in both credit business and Wyoming Kids business. If the payoffs from Wyoming Kids business is better than our cash credit business, we will allocate more resources into Wyoming Kids business for sure. And from the regulatory standpoint, we believe the Wyoming Kids quality education business is more safer from the regulatory point of view. Although it is still very small at this stage, we only have a full quarter of one school, one center only in the first center. So relating back to your second question, in accounting terms, our revenues and costs for the first one center is quite minimal, and it is inside the self-income as well as the cost of goods sold. In two to three years, the return on one-week business, we expect that the unit economics of this business after the ramp-up period will be very attractive. If we look at the offline catering business, the unit economics of net profits will be around 10% net profit margin. And for some other offline education business, the UE for net profit will be around 10% to 20%. So as we have experimented our strategy in our first and second school, we anticipate that the UE of our kids' business will be superior to that of the offline catering and traditional offline education business. Hope that answers your question. Thank you, Steven.
spk03: Very clear. Thanks.
spk06: Thank you. For those who wish to ask a question, once again, please press power 1 on your telephone keypad. For your questions, please press power 1 and wait till you need to be announced. Once again, please press power 1 on your telephones. Our next question is from the... Once again, please press power 1 on your telephones. Thank you. There are no further questions now. I'd like to turn the call back over to the company for closing remarks. Please continue.
spk05: So thank you all once again for joining today's conference call. We warmly invite investors to visit us in Xiamen and very soon in other major cities in China as well. If you come here in person, you'll see that our center is in person. I'm sure you'll be impressed. by the new species of children's quality education that we're developing. And if you have any further questions, please don't hesitate to contact our IR team and visit our IR website. So thank you once again very much.
spk06: Thank you. This concludes the conference call.
spk05: You may now disconnect your line.
spk06: Thank you.
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