Yiren Digital Ltd.

Thank you for standing by, and welcome to the Year in Digital Second Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. And today's conference call is being recorded. I would now like to turn the conference over to Lydia Yu with Vista Relations. Please go ahead, ma'am.

Thanks, Keith. Hello, everyone. Welcome to our second quarter 20.3 earnings conference call. Today's call features a pair of remarks by the founder, chairman, and CEO of Credit East and our CEO, Ms. Ernie Tang, and our CFO, Ms. Nan Mei. Before beginning, we would like to remind you that discussions during this call contain four looking statements made under the safe harbor provision of U.S. Private Securities Litigation Reform Act of 1995. Four looking statements involve inherent risks and uncertainties. As such, the company results may be materially different from the views expressed today. Further information regarding future risks and certain factors is included in our filings of the US SEC. We do not undertake any obligation to update any four looking statements as required under development laws. During this call, we will be referring to certain 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 the financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and vacillations to GAAP measures, please refer to our earnings press release. I will now pass it on to Ming, our CEO, for opening remarks.

Thank you all for joining our earnings conference call today. Before I jump into business updates for the quarter, I would like to first review our new corporate positioning and AI and technology-driven financial and lifestyle services platform. Our new positioning better aligns with our business model that is anchored by three key pillars, financial services, insurance, and consumption and lifestyle services. with underlying business strategies and operational flows driven by AI technologies. The company's AI Lab, which was officially established last quarter, will focus on utilizing large language models and the generative AI technologies to build and develop new products and applications that will work across our business lines. A few examples of what we are working on include a customized virtual AI customer service agent that will be available to respond to customer inquiries 24 by 7, as well as AI-assisted marketing tools and AI productivity tools to enhance our productivity. I will continue to share more details and progress about AI during future earnings conference calls. Next, an update first on our insurance brokerage business. Total growth premiums reached more than RMB 1.3 billion in the second quarter of 2023, up 67% year over year, of which life insurance policies increased 162% year over year. The spike in life insurance policy sales this quarter was mainly driven by the timing of the new regulation that requires life insurance companies to lower their pricing interest rate of newly developed products from 3.5% to 3% and to discontinue selling old products above 3% interest rate. As we continue to invest in product innovation and customization and agent development and the digitization, we noted three key successes this quarter. Average first year premiums increased 15% quarter over quarter. The number of life insurance policy premiums exceeding RMB 3 million increased 206% quarter over quarter. and average productivity of our agents grew by 328%. On property insurance, as mentioned on our last call, reinsurance for overseas construction policies is a new key market we are focusing on. And the total premium for this product segment continued to grow at a fast pace, increasing 77% quarter over quarter. Next, on financial services. In the second quarter of 2023, total loan volume was RMB 8.2 billion, representing a 65% increase year over year. The total number of borrowers in the quarter increased 82% from prior year to 1.01 million. On Yixianghua, which continues to be our fastest-growing loan product, monthly active user number on our Yixianghua app continued to increase 11% from prior quarter to 2.4 million. And the number of average transactions per user increased to 3.2 times this quarter, up from 2.1 times from the second quarter of 2022. indicating a significant increase in LTV over tax ratio per borrower. Last quarter, I mentioned that we have started expanding internationally, in which we hope to leverage our expertise in the consumer finance sector to promote greater financial inclusion worldwide. We launched in the Philippines last quarter under the brand EasyPestle, and have seen rapid growth since. As our team continues to enhance local operational flows and refine our risk models, we have seen a continued improvement in margins. With initial success achieved in the Philippines, we have also started evaluating other regions and expect to expand to one to two new countries in the near future. On the funding cost front, as we continue to diversify our funding sources, we noted a 7% decrease in institutional funding cost in June as compared to beginning of the year. On asset quality, delinquencies remain stable with 15 to 89 days delinquency rate at 2.9% compared to 3.0% last quarter. On consumption and lifestyle services, total GMB generated this quarter increased 28% from prior quarter to RMB 396 million. The total number of paying members this quarter increased 57% from prior quarter to 2.44 million. To conclude, I want to say that I'm really proud of our team for everything we've accomplished so far. It's been a challenging few years, but I'm quite optimistic about the road ahead and grateful to you all for being on this journey with us. With that, I'll now pass it to Nga, who will go through the financials for this quarter.

Thank you and hello everyone. On this call, I will only focus on our key financial highlights. Please refer to our earnings release and our desk for further details. In the second quarter of this year, total revenue reached RMB 1.3 billion, representing 65% increase year-over-year and 34% increase from prior quarter, showing strong financial performance despite a sequence of more challenging macroeconomics this quarter. On financial service, we continue to see strong demand for our credit products with a total loan facility this quarter, which will be $8.2 billion, representing 27% growth over private quarter as compared to analysis projections of an industrial average of a single-digit growth. On insurance, growth rate in priming, which will be $1.3 billion, representing 57% increase year-over-year and 44% increase from private culture, probably drive by strong life insurance policy sales. Revenue from insurance broker service, which will be $404.7 billion for the culture, increased 115% year-over-year and representing 31% of total net revenue. On succession and lifestyle service, Total GMV for this quarter reached RMB 396 million, increased 28% from prior quarter. On the expense side, sales and marketing expense increased 40% to RMB 149 million from last quarter, leading due to our startup investment in brand and marketing this quarter to drive our further growth. Our general and service costs increased 73% from private quarters to RMB $346 million, making drive-by increase in our general and service costs relating to our insurance broker sector. Quarter over quarter, our general and service expense as a percentage of revenue for the insurance sector has remained relatively stable at around 72%. Gen A increased by minus 5% quarter-over-quarter to RMB 97 million. Allowance for counter-assets and receivables was RMB 61 million for this quarter, remaining stable and profit 0.7% of our total loan facility. On to our bottom line, we continue to deliver a strong profit of RMB 127 million this quarter, increased 24% quarter-over-quarter. We generally approved RMB 780 million net cash from operating this quarter, an increase of 84% from private quarter. Total cash and cash equivalent was RMB 5.8 billion by the end of this quarter. Early in June, we announced the acquisition of licensed financial guarantee company in China, which will enable us to provide financial guarantee service and continue to inspire our credit business segment as well as other business models. Going forward, we will continue to seek out opportunities for new initiatives and strategy investments to foster business growth. Generally, we remain confident in our company's business fundamentals and growth opportunities. Therefore, we continue to execute our share with purchase programs. This quarter, we have deployed close to $1 million to pay back our shares in the public market. As of June 30, 2023, the company has accumulated around close to $3.5 million for our payback shares. Based on the company's preliminary assignment of business and market conditions, the company projects the total revenue in the third quarter of this year to be between RMB $0.9 billion, to the NB121 billing, with net profit margin tempted to remain stable. With that, we conclude our closed remarks. Operators, we are now open for questions. Thank you.

Yes, thank you. If you wish to ask a question, please press star then 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. If you are on a speakerphone, please pick up the handset to ask your questions. And the first question comes from Andrew Leon, a private investor.

Hello, my question is, the CEO is 60% owner of the company. I guess you want the stock price to increase, and currently the volume is, I just calculated it, and it's very low. Buybacks, they are very hard to do with this volume. Would you consider a dividend as J Fin, J Intech did a dividend? Also, it will legitimize the company that it is official. Another question, the second question would be about your auditing. If you could go ahead and talk about the legitimacy of your numbers and the fact that it took three auditors and more than one year to get the latest financial statements audited. The company looks amazing on paper. It has like $800 million in cash and $200 million in market cap currently. So I'm very curious about the legitimacy of the numbers and why that happened. Thank you.

Yes, now we'll comment on the auditing question. And I'll answer the first question. We have no intention to delist the company because being a global leading fintech company is our strategic objective. We believe UNDigital is our flagship for that strategic initiative. And current geopolitical challenges, as well as what you may well know, about the past few years. Yeah, not so stable market conditions regarding FinTech collectively have caused trouble in terms of valuation, not only for us, but also for other players in the sector. What we've been doing is to work very hard on business fundamentals and also to do a better job communicating with the market regarding our strategies and operations. And you may remember that a few years back, we were a clear leader in the markets. and we are hoping and we are also confident with hard and smart work we will regain our market leadership position and also we have a relatively large cash position that can help us invest into the future including things like AI and global expansion. As I mentioned, we are expanding to other markets, which is a very promising direction in my view. AI will be very significant in my view. And my hope is that in three years' time, the company will be transformed into a new market global fintech leader. Yeah. Thank you.

But again, could you comment on the dividend policy? Like if you could do a dividend policy, Jfin, J-I-N-T-E-X, it grew recently in stock price and in volume. They're also owned by the CEO 50%. I would like Mr. Ning Chang, if he could comment on the possible dividend.

I'm the founder. Yes.

Oh, hello.

Yeah. Yes, I've been speaking, yes, and this is me. And we have currently no such dividend policy. We keep evaluating different possibilities, different strategies. But currently our view is that, yeah, this strong cash position can help us fan off

any potential uncertain challenges and also investing for the future okay but if you want your stock price to increase uh couldn't you consider like the discount to value is a very high buybacks are out of question also another idea would be x financial x y f ticker symbol they uh bought back shares the repurchase shares from uh directly from employees that have stock maybe you could consider that in increasing the daily trading volume in order to move the needle of the stock price and also the volume. So buying from employees, could you consider that?

To be honest, we are also disappointed that we haven't been able to really deliver value regarding share price. That's why I just said that we will try and do a much better job communicating with market stakeholders. But regarding employee shares, I believe our team members love to enjoy upside with the company, and they also deserve it. So I very much want them to enjoy the upside as opposed to buying shares from them at this low valuation.

Okay. Consider again the dividend policy introduction maybe for next quarters and consider Jason, which did this dividend policy and had a three X, four X stock price increase and volume entered the company. It's much more healthy right now because they made a big dividend, a 30% dividend yield in six months. So they're paying like 6% now and 6% later in six months. Or they paid 6% already. JFIN is similar to YRD in my opinion.

Thank you for your suggestions. And now, can you please answer the second question?

Hi, Andrew. This is Lydia, Investor Relations. Just on your second question, can I quickly clarify with you first? Your question is on auditing. Because I know that we released our annual report this year in April, which is actually on par with the kind of free average. So I just wanted to clarify on what you're asking on our auditing.

Okay. Then that was resolved. It was just Yeah, the change from the KPMG.

Yeah, okay. Dividend. Dividend. Later, just because there was a change in auditor. So, you know, it took additional time for the new auditor to get satisfied with other numbers. But for our 2022 annual report, it was released on April 28th this year.

Yeah, okay. Thank you.

Okay, thank you.

Consider that dividend.

Thank you. Once again, if you would like to ask a question, please press star then 1 on your telephone and wait for your name to be announced. And the next question comes from Matthew Larson with Fincadia.

Hello. Good evening. Thanks for taking my call. A couple of things on the subject of the buybacks. got cut off and had to call back. So maybe you mentioned it. You're scheduled to buy back $20 million worth of stock this year. You are volume constrained to a certain degree. But the volume over the last two months has averaged considerably higher than the first six months this year. What are the restrictions as far as you have when it comes to the amount of shows you can buy back on a daily or weekly basis? What percentage?

Can I please answer that question regarding buyback?

Yeah, yeah. Yeah, I will answer this question. As you mentioned, when we perform our payback, we have to follow up the restriction on our sales provider amount. Basically, the limited restriction is that the payback amount of the company in front is no more than 50% of the average down week's liquidity amount. So we have to comply with the rules. about at least 50% to 20% of the total marketing value.

Okay. And if you could tell me how much have you bought back year-to-date of the $20 million that was announced before the year started?

Yeah. As I mentioned, we announced the new share purchase payback program last year. And as mentioned in my script, by June 30th this year, the accumulated amount is $3.1 million. And the latest amount by today is about $5 million for your revenue. Yeah.

Okay. So, I mean, you've been a pretty significant buyer. I mean, it's going to be tough to get your $20 million in there unless you get the volume up. Yeah. Here's a, uh, I've been a longterm investor off and on with your company. I've been on the conference call before a few times. Uh, I, uh, frankly, uh, participated in your IPO when I was at Morgan Stanley in December of, uh, 2015, uh, when you were a peer to peer lender, uh, and you know, your stock had ultimately gone to $50, uh, when, uh, That business was not as highly regulated by, you know, the governmental agencies and the PRC. But you've reinvented yourself. I mean, you're still a lender, I guess a capital life lender, but your real growth seems to be from insurance and financial services and what have you. You still have a loan book of about a billion dollars. Do you keep any of those loans on your books since you've got $800 million in cash? The regulatory authorities prefer that because that's what the banks have to do. And the capital light strategy is great as far as a risk point of view to you all. But the more loans you keep on the books, I think, would appease regulators. Can you answer that for me, please?

Yes, I will answer your question. As you mentioned, we have such a big cash balance in our finance statement. So actually, we have also used our own funding to service our own credit. So we have cooperated with interest companies this year. And by now, we have 600 million RMB. We have cooperated with the trust to service our credit in Yixianghua. And we also have our own financial license company and we can also use this financial license to service Yixianghua. Yeah, as I mentioned in my script, in June, we also have a financial guarantee company. And this financial guarantee company can also service our credit business and also have to cooperate with other funding partners. In the cooperation with the funding partners, our company can deliver the direct guarantee service to our customers, which will also be a way to cost our cash balance. Yeah, of course, we will still keep on cooperating with other financial companies to use our cash balance to support our business development. Thank you.

Okay. A couple more questions. The previous caller, you know, commented on the stock price, which I always have. I mean, you trade for less than one times, you know, forward earnings. You trade at about one quarter of your cash balance. These sorts of valuations would not exist anywhere on any exchange outside of the Chinese PRC stock. There are other companies that trade well below cash because there is a disillusionment in investing in the PRC right now. That can change. I believe in mean reversion, but people are distrustful. rightly so, of these sorts of valuations. The previous caller was asking about your auditors. But you're not alone. There's other companies that trade below it, but you are in particular. Plus you're growing your earnings dramatically and your user base and what have you. In your news release, you mentioned AI three, four, five times. In my judgment, you, your company, and other fintech companies have used AI or some aspect of AI for years. That's how you make your loan decisions from customers who use your service. You do a quick algorithmic review of their creditworthiness. and then you approve it or don't approve it. And I think you need to highlight that. You put out very few news releases. The only ones that I've seen since the last earnings call was the announcement that you bought the Chongqing Jintong Guarantee Finance, which you just talked about. But, you know, you didn't mention whether it would be accretive. or really what it was going to do, other than we could draw our own conclusions. But why don't you put out more PR, more and more news releases, highlighting AI, that you're an AI company, you always have been, and you should be valued like companies that are employing AI for their productivity growth. You know, that's one of the problems. Nobody even knows about your company. When I'm on these conference calls, often I'm the only person or maybe one other person. You don't have any research coverage, even though you used to be followed by Credit Suisse and Morgan Stanley and companies like that. But they dropped covering you, you know, when your stock price got too low. And also the previous caller mentioned another company, XYF. which is a higher-priced stock slightly. That was underwritten by Morgan Stanley as well. They don't follow that anymore. But it does trade at a higher multiple. And then the market leader in the consumer finance area, fintech, which is QFIN, is about five times earnings, and it trades like two times, three times book. So... I expect and really demand that if you're interested in a higher stock price, which I assume you are, particularly when your stock used to be 20 times where it is, you must look back on those days and just wish because the personal wealth for your employees and yourself would be dramatically improved. So please, get a company to be in charge of public relations and tell the story out there to investors. Many small-priced stocks, even many from the PRC, double or triple in a day on almost no news. Here you report a blowout quarter. and you've got growth across almost all your business lines, and I don't think anybody even noticed it. But for shareholders who've been patient, we wouldn't mind a little upward trajectory in the stock. So that would be a strong recommendation on my part. And let's see what else I have. I think that's it. So you've got to get the word out there. You have to keep using AI because what you're doing now, you know, talking about AI, talking about your valuation, you know, have you ever thought of doing a road show? I mean, there's – I mean, if you had a one dollar gain in your stock price, I mean, that would be a tremendous percentage gain. It would also make investors like myself significantly add to our positions. All right. I have I've had large positions in it. I do. relatively so, but I'm reluctant to put more money in the money. I'm a financial advisor because there's only so many $2 stocks that you can have in a client account as a percentage. Otherwise, you bump up against compliance issues. So the best way to get your stock up there is to get the word out All right? Talk about your AI initiatives. And as far as making share buybacks, if you're restricted by the volume by your broker and by the SEC rules, what about some insiders? I mean, all these employees who don't want to sell you their stock because they want to grow with it. It'd be nice if you had some that could buy 10,000 shares or 50,000 or something. That makes news. So, you know, you need somebody new in the PR area. My 18-year-old son, who's on Instagram and other social media, TikTok, he could take this story and triple your stock, I bet, just by getting it out there and getting one or two influencers to pick up this story, whether it's Reddit or WallStreetBets.com. I mean, does that make sense to you? I mean, your company is worth at least four or five times where it is now, and that would still be undervalued, okay? That would be four times earnings. How about ten times earnings, all right, with all the cash you have? Ten times. Would your employees and would you all like to see your stock up tenfold, okay? So that would be my suggestion. You know, I think it's common sense, frankly. So I hope you take some of my suggestions and that of some of the other callers. And also, just look at your stock price. Do you want to be a wolf or a mouse, I mean, to be honest with you? So I appreciate your tremendous performance. Thank you very much, and that's all I have to say, but I hope to see some of these reforms.

Got it. You'll see more and more. Last time I heard you loud and clear, and now we have this AI, yeah, more and more, and, yeah, so appreciate that. We will double, triple our... Marketing, communications, effort. Yeah, probably consider hiring your son for marketing.

Well, you know, I'm not suggesting he's – I'll make it clear. He's not doing this. I'm saying that a young person's skill set in going on Twitter, Instagram, TikTok, you name it, Just think if 1,000 people knew about your stock and they all bought $8,000 worth of stock. That's an $8 million concentrated interest. That's how you get stocks to lift, is getting more than just one or two people knowing about it. Anyway, he's not doing it. I want to make that clear. Absolutely.

Absolutely. Yes, yes, yes.

All right. So thank you very much. Have a great quarter. I'll continue to be an investor. But if the stock starts to lift... I buy on strength, okay, and in size, and I'm just one guy. So please consider some of my suggestions because I've been on the buy side for 40 years, and, you know, what have you got to lose, all right?

Yes, we will, definitely.

Very well. Thank you for your time.

Thank you for being with us.

Thank you. And we have a follow-up question from a private investor.

Hello. Again, me. So following what the other shareholders stated, I would like to add the dividend again. I may be doing just a 0.1 dividend is enough to catch some eyes of investors, like a 5% dividend. Again, I don't know if you, Mr. Ning Tang, the CEO, knows Dingo Yan, the CEO of Jain Fintech, but they did the dividend and it caught eyes and it did bring investors and volume towards their company. Of course, everything what the previous caller stated is valid and I would also do. But again, consider the dividend because if you do a dividend, I think investors can see which are searching for dividend plays. They might find your company and stumble on an insanely deep undervalued play. That's it. And sorry to repeat myself, but the previous caller did not state the dividend.

Got it. We heard you. We will, yeah, repeat. work on evaluating these and other possibilities.

And road shows. Road shows will help also.

Okay. Thank you. Thank you. This concludes the question and answer session as well as the call. Thank you for attending today's presentation. You may now disconnect your lines.

Thank you all very much for this constructive talk. remarks and yeah, comments, suggestions. We will work along these lines. Yes, thank you.