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Operator
Good day and thank you for standing by. Welcome to the year-end digital fourth quarter and fiscal year 2020 earnings 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 one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to our first speaker today, Ms. Lydia Yu. Please take over, ma'am.
Lydia Yu
Thank you, and welcome to EARN Digital's fourth quarter and fiscal year 2020 earnings conference call. Today's call feature is a presentation by the founder, chairman, and CEO of Credit East, and CEO of EARN Digital, Mr. Ning Kang, CEO of EARN Credit, Ms. Mei Zhao, and CFO of EARN Digital, Ms. Nan Mei. And CRO of Aaron Gittal, Mr. George Liu, and Mr. Dennis Tong, Director of Aaron Gittal, will join the presenters in a Q&A session. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and certain factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties, or factors is included in In Detail's filings with the U.S. Securities and Exchange Commission. In Detail does not undertake any obligations to update any forward-looking statements assessed as required under applicable law. During the call, we will be referring to several non-GAAP financial measures and supplemental 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 financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GET measures and reconciliation to GET measures, please refer to our earnings press release. I will now pass it on to Ning for opening remarks.
Ning Kang
Thank you, Lydia. Thank you all for joining our fourth quarter and the full year 2020 earnings conference call. Looking back, the year 2020 was an unusual year as we faced a complex macro dynamic with impact from the pandemic and an evolving regulatory environment. Despite that, we are pleased to have accomplished significant milestones and continue our progress in our strategic transition to further solidify our position as China's leading digital personal financial services platform Before I go further into detailed business updates, I would like to highlight three key milestones that we've achieved in year 2020. First, we completed a business restructuring at year end in which we spun off our legacy P2P operation. The spun off operation will be run independently to focus on is smooth transition and winding down. And we expect many investors of our legacy products to transition to our other wealth management products. The restructuring will allow ERIN Digital to solely focus on our strategies to grow our wealth management and the loan facilitation-based credit tech businesses with full force going forward. Secondly, our wealth management business has achieved significant growth with strong demand, with the revenue generated from our current wealth management products, excluding our legacy products, accounting for 31% of our total net revenue in the fourth quarter, up from 12% in the third quarter. Even wealth has also finished its strategic rebranding and repositioned itself as a one-stop asset allocation-based professional wealth management platform, providing our clients with a wider range of well-selected products and optimized services. To date, ERIN Wealth has established partnerships with over 60 financial institutions, and provides over 4,000 products to meet the comprehensive needs of China's mass affluent customers. With both strong product service offerings and significant growth of investor base, we expect our wealth management business to provide strong revenue contribution to our overall business in 2021. Thirdly, as part of our one-stop asset allocation strategy to further enrich our product portfolio and services. We acquired an insurance broker, He Xiang, in 2020 to initiate our insurance business, and it has been growing at a significantly better than expected rate, bringing in strong synergies to our other wealth management products and services. Positioned as a comprehensive insurance broker with both online and offline channels, He Xiang has so far established partnerships with over 150 insurers nationwide and offers over 350 insurance products covering life and property and casualty insurance, serving both individual and corporate clients. He Xiang's business priority in 2021 will be to introduce more new products and to increase the proportion of higher take-rate products, such as life and health care insurance, to further drive the profitability of our wealth management business. Now, I will provide a business update on our wealth management business. and then pass it over to Ms. Mei Zhao, CEO of Eden Credit, to give an update on our credit business. On wealth management, we continue to see impressive growth momentum and that the demand remains strong going into the year of 2021. At the end of December 31, 2020, total client assets for our current products which exclude our legacy products, increased by 71% from prior quarter to RMB 8.6 billion. In light of the joint notice issued by the PBOC and the CBRC on regulating commercial banks to conduct personal deposit businesses through the internet, at the end of January, we have stopped facilitating online bank deposits and shifted our focus to other wealth management products. Online deposits represent only a small portion of our revenue from investors. Thus, the financial impact of this adjustment on our business will be minimal. Meanwhile, our fund products remain the top pick among investors, with Total client assets in fund products increasing by 10% quarter over quarter to RMB 1.5 billion. And then the average investment in fund products per investor reached RMB 61,000 as of end of the fourth quarter. Particularly, our self-selected fund up portfolio products enjoy high demand due to strong performance. which will become a main growth driver going forward. Moreover, we also plan to launch a new securities brokerage business in the second quarter this year, which will further enrich our wealth management offerings and provide investors with high-quality services to the financial markets in both the US and Hong Kong. Targeting the mass affluent and high net worth population, we distinguish ourselves from other online brokers with differentiated value of wider range products and quality services, including customized one-on-one investment consulting services and the bond products. So there are a lot to expect in our wealth management businesses this year. With that, I now turn the call over to May who will highlight some key updates for our credit business.
Lydia
Thank you, Ning. And hello, everyone. I will now provide an update on our credit business. We continue on our upward growth trend in the fourth quarter, following two consecutive quarters of the growth in the loan volume, helping us close the year strong. Our product makes changed significantly in the 2020, with our small revolving product, Yixianghua, and the secure auto loan growth into our main revenue contributors as we continue to drive up the scale. In the fourth quarter of the 2020, they together accounted for 87% of the total loan originate as compared to 67% in the Q3, and the proportion has already exceeded 90% now. Compared with unsecured standalone products, these two products show better risk of performance and endure higher unique economics, which enable us to further drive up the probabilities going forward, particularly It's worth mentioning that our continual efforts in the product design and innovation is playing an increasing role in the driving growth. For Yixianghua, the product has been upgraded to a robust integration of the low and the high credit limits in revolving products, leveraging years of the outstanding products and risk experiences. We have also expanded our ecosystem with our organic cooperation with the traffic consumption platforms and also build our own e-commons mall. The product better serves the customers in need of the cash loan, consumption loan. We pilot launch this new product in the third quarter last year and it has been an immediate success. which is volume already increasing to 46% of the total volume for Yi Xiaohua in Core 4. Meanwhile, we are also explored to offer a new value as services and products in our auto-related ecosystem, such as auto insurance, which are potential new area of the growth in the revenue leveraging He Xiang Insurance broker license. and we bring further synergy to our business. Furthermore, our operating efficiency shows visible improvement as we continue to enhance our operating capabilities. The customer acquisition cost for Yixianghua declined to around 2% in Q4 from close to 3% last quarter On the one side, we deepen our cooperation with the Internet traffic platform. On the other side, receivable has achieved improving growth at a lower cost as the increasing portion of the customer is re-borrowing using the revolving product feature. The product's approval rate also showed visible increase as we further refine our marketing strategies and credit underwriting capabilities. For auto loans, the approval rates reached 75% in Q4, a historical high, due to our continued efforts to better target customers with higher credit quality. Lastly, our asset quality continued to improve as a result of our ongoing efforts to tightening up our risk control shifted to better credit quality customer base, as well as transitioning into the products with better risk performance. Our vintage risk performance has consistently improved quarter by quarter with the comprehensive end-to-end integration of joint risk management with the consumption platform. acquisition, portfolio, and collection risk management. Our 15 to 89 days delinquency ratio is 1.7% to our continual business as compared to 4.3% for our overall business as of December 31, 2020. We expect our asset quality to witness a further concrete improvement in 2021. With that, I will now pass it to our CFO, Na, who will provide a financial update.
Ning
Thank you, Mei. Hello, everyone. For the financial update, I will focus on key items of our business operation under financial performance only. You can refer to the detailed financial results in our earnings release at our desk. That has been posted on our website. First, our operational highlights. For our wealth management business, as of December 31, 2020, we have served close to 2.4 billion investors. And the total number of active investors in our current products, including legacy P2P products, growth to $215K. Client assets in our current product increased to over 7 times year-over-year to RMB 8.6 million as of September 13, 2020. On the credit side, long automation for the quarter was RMB 4.2 billion, representing an increase of 31% quarter-over-quarter. Secure Auto Loan and Yi Xianghua, our small, rewarding loan products, continue to be the main drivers of our loan volume growth. Starting from this quarter, our credit business model has transitioned to a pure loan facilitation model, whereby funding for loans is currently 100% from our funding partners, and we provide tech-enabled borrow accession and facilitation service to our partners. On to our financials. Here is the fourth quarter. Total revenue increased to 14% from prior quarter to RMB 1.2 billion. With our revenue needs continue to change as a result of business transition. Our wealth management business is becoming a meaningful contributor to revenue, representing 36% of net revenue this quarter. Other income growth significance increased 95% from private culture, mainly due to the write-up in our insurance business. Our total expense increased by 19% from private culture to RMB 1.7 billion. Sales and marketing expense decreased 39% from private culture to RMB 295.1 billion. Follow-up acquisition expense is currently the major component of our sales and marketing expense, as it decreases culture with mainly driving by organization restructure to optimize operational efficiency. Our original under-service expense increased 149% from prior culture to only 597 million, mainly due to an increase in low service cost plus increased commission expense to sell China as a result of expanding insurance volume. Allowance for counter-assets and receivables was RMB34.5 million this quarter, equivalent to 0.8% of loan volume, as compared to 0.8% last quarter, due to increased risk to performers driving by a shift in loan-product mix. Loss of disposal on Hangcheng of RMB655.8 million is the one-time loss during night in relation to our business restructure. The disposal consideration was determined using a DCF model that reflects the future expense losses to be incurred by Hengcheng Agitate and included in the Fairness Report issued by an independent value. Net loss for the quarter was then be 559.6 million, including the one-time impact as measured above Non-debt net income for the quarter was RMB 96.2 million, representing an increase of 21% quarter over quarter. On the balance sheet side, our cash position remains strong with RMB 2.6 billion of cash and shelter investment as of December 31, 2020. Before I end with our business outlook, I would like to emphasize that As we transition and upgrade our credit business model to a loan facilitation model and from providing a single standard loan product to focus on diverse products with best risk performance and high earning potential, coupled with strong growth momentum in our wealth business, our continued business have and will continue to deliver strong financial performance. Looking into 2021, We expect wealth management sales volume of current products to be the range of RMB 20 million to RMB 30 million, and the total loan facility to be the range of RMB 20 million to RMB 25 million. This forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change. This concludes our close remarks. Operators, we are waiting for Q&A.
Operator
As a reminder, if you wish to ask a question, please press star 1 on your telephone. To withdraw your question, press the pound or hash key. Once again, hit star 1 to ask a question. As a reminder, it is star followed by the number one on your telephone keypad to ask a question. We have a question coming from the line of Matt Larson from National Security. Please go ahead.
Matt Larson
Thanks for taking my call. It's kind of a complicated quarter. From what I understand, you've disposed of your legacy P2P business, took a charge, and you're focusing on higher quality micro-lending and asset-backed lending with the auto loans and things like that, plus you're building out a wealth management platform. And you're doing so because you have a legacy of, client base that you've had frankly since you went public I was at Morgan Stanley when you went public in December 2015 and I think you really the first P2P company to do so and were very successful until that business you know got regulated out but other companies have transitioned like In particular, I could suggest that Finvolution, which used to be called something else, has successfully transitioned their P2P business to a... What's the term they use? Well, they get all their funding from the banks. You decided not to go that route, and I think your best... asset is your significant customer base, your legacy people, and you're transitioning them into asset management, mutual funds, things like that, and then letting them money. The thing that caught my interest was that in the second quarter, you should have a brokerage unit set up because that's really where you're seeing some super growth, at least in some companies that are listed here, Tiger, Futu, because of the real interest in trading securities and brokerage that we're seeing globally. Can you give us any estimates about how that's going to impact your earnings and revenues? Because the growth of the businesses you've just discussed looks good, but it's coming from a very small base. Your growth in insurance and assets under management. They're still quite small. And I'll conclude with, you know, one of the assets that is appealing to your company is you have a huge cash position relative to your market cap. But as far as the growth of earnings, can you give us any guidance of what you can expect for 2021, particularly if you get the brokerage unit up and going?
Ning Kang
Thank you for the question. And this is Ming, and I'll take a crack, and other colleagues, including Dennis, can provide more details. And a couple of thoughts. One is that actually on the borrower side, on the credit tax side, we do have this. loan facilitation model doing very well, growing fast. Actually, we work with banks which provide funding to borrowers. And on that front, our very unique strength is in our online-offline combination model which is we have online capability And we also have a national physical network helping us do better credit assessment work for certain types of credit business. And that's for the borrower side of the legacy P2P. And on the lender side now, is becoming the wealth management business, as you correctly described. Also, we have this insurance part that is growing fast, serving both the borrower side and the investor side. And the online brokerage business will go live the second quarter this is we expect a value driver for our business we have the investor base which we like to serve better with more service offering like the online brokerage offering so yeah this is going to be a key value driver in my view, but other businesses, what we just discussed, like the loan facilitation, credit tech business, the wealth management fund portfolio business, as well as the insurance business, in my view, are also high-quality businesses that clients really like.
Dennis
the company will benefit from so yeah thanks Ming and let me add a very few points I think as you mentioned the p2p transition is actually very successful underway and we are continuing to work on the credit business side as we mentioned. On the wealth management business, if you look at the Q4 revenue contribution from the pure wealth management business which is excluding the legacy P2P business completely, the revenue contribution is already reaching 31%. That's quite significant compared to only 10% in Q3. clearly demonstrate the momentum and business demand from our large investor base. In terms of the online broker business, it's one part of our overall asset allocation strategy for our mass affluent investor base in China because they have their demand for mutual fund, bank products, insurance, but they are also interested in capital markets. We see stronger demand from customers, especially in 2020, as the overall capital market is becoming very active in China. And we believe providing these online brokerage services will help us to better serve our client base and provide synergistic opportunity to get more of their assets on our platform. And then in terms of how much contribution from wealth management business, if you look at the sales volume guidance, you will probably see for the loan business, we're looking at growth double. For the sales volume of the wealth management business, we're also looking at significant growth percentage year over year. which means that the overall wealth management business on our platform will become a very meaningful part of the whole platform. And of course, right now, for the online brokerage business, we'll start serving our existing customers first. But as you have mentioned, it's a very high-growth market in China, and we expect to expand that into larger market opportunities as the business matures.
Matt Larson
Okay, so it looks like you're transitioning from your legacy P2P business into just a full-service wealth manager where you're offering a collection of loans, asset-backed loans, some unsecured loans still, but not P2P. These would be... you know, what do they call them? Well, we'll fund it directly through banks and, and then you're offering insurance and then, uh, in the future brokerage so that you have a legacy, uh, client base. Okay. You know, very large one that, you know, emanates from years back when you were a P2P lender that you can leverage the relationships from these people, uh, and move them into, uh, more traditional investment products and loans that are, I guess, you know, looked upon more favorably by regulators because the P2P business, of course, had to be, you know, downsized or converted. I mean, other companies like 360, Finance, Lexing FinTech, and, you know, I don't know what else is there over there in the PRC. They have successfully gone to the credit light business model with different successes. So am I correct in defining your company as kind of a full service wealth manager offering a number of products and benefiting the investor from the massive growth of this type of business for people in the PRC as people's interest in investment products grow. there's a lot of wealth being generated over there and maybe less will be directed towards real estate and more towards, uh, investment products and loans. Is that an accurate way to describe your company?
Ning Kang
Yes.
Matt Larson
Okay. Um, and then last question, because, uh, I didn't have much time to really look at the, uh, uh, the earnings release. One of the attractions to me, and I've been an investor in your firm, not only when you went public way back when at Morgan Stanley, but recently because your company's been repositioning itself and de-risking, reducing your risk, particularly with getting away from the P2P business. But you've had your balance sheet has been extremely strong. And it looked like your cash balance has declined quite a bit, even though it's still quite substantial. Can you give me a sense of where your cash balance is right now out of any debt versus, say, last quarter?
Ning
Yeah, thank you. Yeah, as of December 31st, 2020, our cash balance and the cash position is going to be 2.6 billion of cash and cash shorting investment and the increase about 2 billion about the cash deposit. Yeah. It's most of the current...
Matt Larson
So 2.6, I'm trying to do the conversion. Uh, that's over 400 million. Is that an accurate, uh, way to in net cash? Is that reasonably accurate?
Ning Kang
Yeah.
Matt Larson
About in you in us. Right. And then if I, I just, uh, I'm a value investor, you know, to a certain degree, uh, And so if I look at the market cap of your company, I mean, you're trading essentially at what the cash value is worth, give or take a bit. So within that framework, you have an extremely strong balance sheet to grow out your business. And for an investor, you're kind of getting – in the sense that you all can grow the business dramatically over time, but in the meantime, one can own your digital essentially of what the liquid assets are worth, the cash. Would that be an accurate assessment?
Ning Kang
Thank you for thinking that way.
Matt Larson
Okay, good. That's the way I think. All right. Listen, thank you very much. I appreciate your time, and I'll let somebody else ask a question if there's anybody else in the queue. Have a nice day.
Ning Kang
Thank you.
Operator
Once again, as a reminder, it is star followed by the number one on your telephone to ask a question. Once again, it is star one to ask a question. We have no further questions at this moment. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may disconnect now.
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