Yiren Digital Ltd.

Good day and welcome to the year-end digital second quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Qiyao Ha, Investor Relations Officer. Please go ahead.

Thank you, operator. Good morning, good evening, everyone. Today's call features the presentation by our founder, chairman, and CEO, Mr. Ning Tang, and our CFO, Ms. Nan Mei. our new CFO, Mr. Yu-Ning Feng, who also attended Q&A session at TED remarks. Before beginning, I'd like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provision of U.S. Private Security's Legislation Reform Act of 1995. Such statements accept risks, uncertainties, and factors that can cause actual results to differ materially from those contained in any such statement. Certain information regarding future risks and certainty of factors is included with the U.S. Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements as required under the relevant law. During the 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 related consultation to GAAP measures, please refer to our Earnings Policy. I will now pass it to Ninh for opening remarks.

Thank you all for joining our earnings conference call today. Despite the evolving market environment, we are pleased to report another solid quarter with strong unit economics, reflecting the resilience of our business structure and operational strategies, as well as our commitment to quality control, to quality growth over mayor expansion. Additionally, our strategic investments in AI and the seamless integration of technological innovation into our operations have fostered dual growth in both technological advancements and operational efficiency. Our strategic direction positions us well to evolve into a leading AI-driven platform, paving the way for groundbreaking solutions and setting new industry standards. Now, I would like to go through our business highlights for this quarter. First, our financial services business. The second quarter of 2024 saw a steady growth with total loan volume reaching RMB 12.9 billion, marking a 59% increase year over year and maintaining a resilient consecutive quarterly growth despite an industry slowdown. The momentum is largely driven by the concrete growth of our new customers with higher credit quality as we continue to optimize our asset quality of loan portfolios. Since the second half of 2023, when the entire industry experienced substantial credit risk fluctuations, we started to proactively upgrade our customer mix and diversify our online acquisition channels. The strategy has proven effective, leading to secure growth and improved asset quality. Meanwhile, we have refined our proprietary RTA credit model for borrower acquisition, which has notably enhanced our overall credit approval efficiency. In this quarter, the number of borrowers served increased by 47% year-over-year to 1.5 million. Moreover, our loan facilitation platform continues to gain popularity with monthly active users rising by 88% year-over-year. to 4.5 million in the second quarter of this year, showcasing strong customer engagement and loyalty. As we maintain our focus on attracting high-quality borrowers and note that existing high-value borrowers repeatedly use our revolving loan products, we expect this growth momentum to continue throughout the year. Meanwhile, our international business is showing exciting progress. The total loan volume overseas nearly doubled in the second quarter of 2024 compared to the prior quarter. In the Philippines, monthly loan volume facilitated exceeded RMB 20 million milestone with the growth rate remaining robust as we move into the second half of the year. Moreover, as our business continues to grow, we are benefiting from economics of scale, with customer acquisition costs decreasing by 18% quarter over quarter. In June 2024, our business in the Philippines achieved a positive net profit margin. It's worth mentioning that our rapid growth is closely tied to our AI development and integration. Our proprietary large language models have been implemented across various operations, including customer acquisition, customer service, risk management, and asset management. For instance, in our international operations, our anti-fraud AI models have processed over 10 different types of identification documents this quarter, achieving a 93% accuracy rate and significantly enhancing our risk management efficiency. Additionally, to standardize our services, our large language models are used in our overseas call centers to translate local languages detect sensitive words and analyze service quality and assurance, thereby boosting customer satisfaction. As more data are processed, we expect continued enhancement of our models in both accuracy and their applicability to a wider range of scenarios and uses. Turning into asset quality, delinquency rates continue to show an encouraging trend as assets from upgraded borrowers increase. Specifically, the 15 to 89-day delinquency rate for the second quarter of 2024 declined to 3.8%, down 10 basis points. The FPD 30-plus delinquency rate decreased for the third consecutive quarter, and the M1 collection rate for the second quarter of 2024 increased by 290 basis points quarter over quarter to a historic high. We expect a sustained improvement in asset risk performance in the second half of this year as we continue to optimize our customer mix and retune our credit risk models. Now, on funding cost, our effort in building an efficient funding management system is showing results. In the second quarter of this year, our funding cost decreased by 82 basis points quarter over quarter, reaching a historic low and exceeding our internal target. The downward trend will continue in the third quarter. Moreover, given the current market funding conditions, we are strategically increasing our loan volume under the risk-taking model to better balance risk management and profitability. Regarding our insurance brokerage business, we have focused more on property insurance and expanded our customer acquisition channels. to hedge against the ever-changing regulatory environment and uncertainties in the life insurance sector. In the second quarter, growth return premiums totaled RMB 1.1 billion, reflecting a year-over-year decrease of 20% and a quarter-over-quarter increase of 16%. The annual decline was primarily due to the impacted life insurance business. which experienced limited sales of first-year premiums as a result of product changes and the new regulations. The quarter-over-quarter growth in premiums is largely attributable to the property insurance business, where premiums reached $557 million, marking a 19% increase from the previous quarter and setting a new record. Going forward, we will continue to focus on three key areas in our insurance business. First, strengthening channel partnerships and expanding the scale of property insurance, optimizing our product mix, and continuously increasing the proportion of higher profitability products, such as liability insurance. Second, in life insurance, we will focus more on high-net-worth clients, addressing their comprehensive protection needs for retirement and savings. Thirdly, we will enhance online customer acquisition by utilizing AIGC tools to improve market outreach and boost sales volume. In our consumption and lifestyle service segment, our GMB increased by 40% year-over-year to RMB 554.6 million. However, due to the high penetration rate of these services among our current customer base, we are observing a moderation in growth rates. Moving forward, the company will focus on acquiring new customers and refining customer profiles to better understand and address their comprehensive needs. Moreover, with the aim to enhance shareholder returns and boost market confidence, we are pleased to announce that the board has approved a new dividend policy. Under this policy, The board plans to declare dividends amounting to no less than 10% of the company's anticipated net income after tax for each half year, starting from the first half of this year. The cash dividend for the first half of 2024 set at US dollars 0.2 per American depository share is expected to be paid on or about October 15th, 2024 to holders of the company's ordinary shares and ADS of record as of the close of business on September 30th, 2024, Hong Kong time and New York time respectively. We would like to express our gratitude to our shareholders and investors for their ongoing support. Finally, we have a management change to announce. First, let me introduce our newly appointed CFO, Mr. Yuning Feng. Yuning possesses over a decade of experience in venture capital investment, investment banking, and financial control. Before joining us, he was a partner at CE Innovation Capital, where he led investments in fintech, enterprise solutions, and AI sectors. Prior to that, Yuning was also served as an investment banker at China Renaissance and a financial controller at Goldman Sachs and UBS. We are confident that Yuning's extensive experience and proven track record will enhance our global strategy and AI focus. and we look forward to the positive impact this will bring. Also, on behalf of the board, I would like to extend our deep gratitude to Na for her significant contributions and outstanding work during the past years. With that, I will pass it to Na, who will go through the financial performance for this quarter. As this marks her final earnings call with us, We once again thank her for her leadership and wish her continued success.

Thank you, Niu, for all the kind words and support. Hello, everyone. On this talk, I will only focus on our key financial highlights, and Yu Niu will draw us for the Q&A section after the prepared remarks. First of all, we are glad to deliver a solid quarter with a healthy profitability. In the second quarter of this year, our total revenue reached RMB 1.5 billion, 30% increase year-over-year. In the financial service segment, total loan facility continued to grow steadily, reaching RMB 12.9 billion, up 59% year-over-year. This is mainly drawn by the growing number of our new powers and the strong demand of our small revolving load products. Revenue from financial service business increased to 46% year-over-year to RMB 851 million. The momentum remains strong throughout the year. In the insurance sector, Alcoa's renting premium was RMB 1.1 billion, a decrease of 20% year-over-year but an increase of 15% compared with the private quarter. The year-on-year decline was driven by a substantial drop in online insurance sales. following local regular change. During same period last year, sales of life insurance products with a cap 3.5% interest rate surged before being withdrawn from the China market due to the new regulation. Therefore, the primary in the second quarter of last year was something high, making a sharp contrast to the decline of the second quarter this year. Meanwhile, the quarterly growth in our total premium was mainly joined by the expansion of our property insurance business. Consequently, the portion of property insurance in our overall primary needs increased, translating into a lower average revenue ticket rate due to the lower commission fee rate compared with life insurance products. In the second quarter of this year, revenue from our insurance segment reached $91.5 billion, down 77% year-over-year. Going forward, we plan to continue growth in our property insurance business in the foreseeable future and gradually carry our life insurance products along with the market trend. In the consumption and lifestyle segment, the total GMV for this quarter reached only $555 million, an increase of 40% year-over-year, but a decline of 11% quarter-over-quarter. As mentioned by Niu, As the penetration rate of service and products in this segment grows into a substantial level, risk-packed growth rate of this segment will continue to moderate. On the expense side, sales and marketing expense increased 21% year-over-year to RMB 285 million. This growth was mainly fueled by the swift expansion of our finance service segment and enhanced marketing efforts focused on attracting new and high-quality customers. as we continue to redefine our customer base. Research and development expense increased to 69% year-over-year to RMB 156 million due to our ongoing investment in AI enhancements and technological advancements. Our internal and service costs decreased to 29% year-over-year to RMB 247 million. This is primarily due to the deeply insurance business volume potentially the sharp decrease in the first-premier for our live insurance products, which led to low channel rebates and a relevant settlement cost. Our G&A cost increased 8% year-over-year to RMB $138.7 million, remaining largely stable. The launch for control assets and receivables was RMB $123 million for this quarter, a 152% year-over-year increase and 20% quarterly growth. The increase was mainly drawn by the growth in total loan volume facility. Moreover, provision for town TJ liability in this quarter increased to RMB 278.9 million for RMB 12 million in the same period of last year. This is due to our rapid rate up in loan volume facility by our risk-taking model, which leads to a significant upfront provision and a carer accounting policy. However, over time, this provision will periodically transfer to Guaranteed Service Day. Actually, in the second quarter of this year, the revenue from Guaranteed Service reached the RMB 78.9 million, more than four-tenths of that in the same period last year. Now, on the bottom line, our net income decreased 22% year-over-year to RMB 410 million this quarter due to three reasons. Firstly, over-probability in the insurance business declined as mentioned above. Secondly, market expense increased due to our ongoing investment in attracting new high-quality borrowers for our financial service business. Thirdly, substantial upfront provision has been accrued as we rate up our loan volume under the risk-taking model. Currently, our profit margin reached 27.4%, still the highest level in the industry. Regarding the cash flow, we generally probably remit $369 million net cash from our operation in this quarter, remaining healthy and strong. On the balance sheet side, our balance sheet remains strong with RMB 5.5 billion in cash and cash equivalents as of the end of this quarter, and we are exploring diversified ways to enhance our shareholder returns. As Ning just introduced, we are pleased to announce a semi-dividend plan with no less than 10% of our after-tax income for the prior six months distributed to our shareholders. A credit dividend of $0.2 U.S. dollars for American dispossessed shares is intended to be paid on about October 6, 2024, to holders of the company's auto shares and ADIs of record as of closed business on September 13, 2024. Moreover, we are still doing share buyback. In the second quarter of this year, we allocate $4 million U.S. dollars to purchase shares in the public market. We are a total deployment for the Shell Reporters' Procurement to US$13.5 million by June 13, 2024. Lastly, our business outlook. Based on our seismic and carbon business and marketing conditions, we expect our revenue for the third quarter of 2024 to stand between RMB1.4 billion to RMB1.5 billion, with a health and land profit margin. This represents our current and preliminary assignment, which may be subject to change and uncertainty. This concludes our remarks. Operators, now we are open for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Ethan Yu with First Trust Group, Inc. Please go ahead.

Hi. Thanks for taking my question. Congrats, Arnold. My first question is about your AI development. As disclosed in your ESG report, the company has developed a range of AI systems. Regarding your AI strategy, have there been any notable advancements in AI applications or research? Can you share more details about any specific investments in the AI sector? And also, have there been any significant breakthroughs in our AI product commercialization?

Excuse me, Ethan. I'm sorry, you're not coming through clearly. Is it possible to move the microphone closer to you and repeat, please?

I got the majority of the question, and it's about AI development, investment, commercialization, right? Yes?

Okay, he accidentally disconnected. Just a moment. He must have pressed something accidentally. So, we will, would you like to go to the next question and have him come back?

Follow you.

Would you like me to have the next questioner ask? And then when? Yeah.

Go to the next question.

Thank you. Okay, the next question is from Bruce Oren with Black Lab Fund. Please go ahead.

Yes, hello. I'd like to express appreciation to the board for the new dividend. I think that's a good move. I'd also like to congratulate and thank Mrs. Namé for helping to build an extraordinary company under circumstances that were often difficult. Thank you. I have two questions. The first is, could you add some insight into the large second quarter increase in net cash used in investing activities and net cash used in financing activities? And my second question is, where is most of the international business growth? Thank you.

Can Na please cover them first?

Yeah, as I mentioned in my script, for our capital, for our operating business, we can earn a nice income of pretty about... As we mentioned before, To the purpose, our financial service segment, the management is financial leasing opportunity to pay our companies going on .

I cannot hear you very clear now.

Now it's better? I'm close to the phone now.

It's better now, yes.

Yes, please repeat. Thank you. Please repeat. Thank you.

It's about the cash items and also our international business, yeah, markets.

Yeah, I'm going to explain our investment cash flow, the reason why we increased so much in the face counter. And as I mentioned, as you remember that last year, we purchased a new financial guarantee company, Chongqing Tingtong, to our financial service segment purpose. And for this year, the management is still going on to import my financial license to purchase for our financial service businesses. like the AMC assets company and micro small lending companies and other financial guarantee companies for business development purposes. So for these financial license companies, before they come to the formal operations, the purchase process, based on the communications status, we should replace the investment amount to our partners. to lock the acquisition target. So you can say our investment cash flow is running the catch-out that most of our investment payment to our potential financial needs target. I hope my question is answered. My question, my answer is ask your question.

Yes. Do you see the cash used plateauing or continuing to grow greatly?

Yeah, I think you can see for the cash from the operating will keep the housing and the stable cash flow. And also we have used the cash to other investment opportunities. no matter the internal financial license or the international overseas business development, also in our AI strategy, we also have many cash expandations. But in our forecast, we still have the confidence in our cash and cash equivalent balance. We think it will be a strong status in the next quarter. Thank you.

Once again, our international business covers the Philippines and Mexico, and we're also looking to expand, yeah, to certain other markets in Southeast Asia and, yeah, other parts of the world.

Thank you. Again, if you have a question, please press star, than one on a touch tone phone.

Is the first gentleman back?

Yes, we have him now. Okay. Please go ahead.

Shall we cover the AI investment implementation part? Yes?

Yeah, yeah, yeah. Hi, Ethan again. Can you hear me now?

Yes, I can hear you very clearly. Actually, as I reported at the beginning, we use AI extensively in our operations, and we also try and leverage the technology capabilities developed internally for potential external opportunities. We have FinTech partners, financial institutions that are interested in our solutions. I hope we'll see some results later this year or first half next year. At the same time, we try and build a strategic investment and partnership infrastructure, like ecosystem. We've made a couple of small, but in my view, hopefully, very promising investments in the AI space, but their contributions are very tiny. Going back to our AI use cases internally, for example, we use AI in customer acquisition, customer service. We use robots. like, yeah, and the large language models, yeah, for, like, incoming outbounding calls. Like, say, when we detect a customer, like, emotion, yeah, change, yeah, it's time to switch to, like, human, like, yeah, operator. We'll do that. And also, yeah, the machine can interact with the customer up to the right point to switch to the human and so on. And of course, we use like voice recognition, like technology, And also, I gave the example, like, yeah, we, our large language models, yeah, used in the Philippines, right, can do, like, great, like, visual recognition algorithm, like, because in the Philippines, like, IDs, personal identification, like a paperwork, it's really paper. So it's not very digital and it takes quite some skills to detect the risk. So AI plays a key role there and so on. So yeah, basically, yeah, we use AI extensively in our own operations and some like, yeah, technologies are really welcomed by outside, like, partners, prospect, like, buyers, yeah, so customers. So we'll try to monetize these technologies as well.

Okay, thanks, Tom. My second question is, there is a continual rise in your R&D costs. Could you share with us more about how these costs have been used?

Yeah, so for our AI, large language model development, we take open-sourced applications like a model combined with our own data and business algorithm to develop our proprietary models. And we purchased hardware and developed software and so on. And so in the second quarter, I believe, yeah, it was about... 56 million RMB. I think this is money well spent. I think our investment in AI has been prudent, but strategic for the future.

Thank you, Mr. Tom. I have another question about your Yeah, yeah. Can I ask one more question about your overseas business?

Sure.

Yes. Can I know what is the total loan volume of facilities overseas in second quarter 2024? I'm impressed with the growth rate achieved in Philippines. And also you have mentioned that you have made another progress in Mexico. And what is the driving rate achieved in Philippines?

Say it again, sorry, the last part?

Yeah, what is driving this growth and what's your outlook for the revenue generated from overseas business and profit in, let's say, second half of 2024 or the coming 2035? I see.

Well, yeah, the growth rate has been phenomenal largely because the base is too small. Yeah, so we really hope to grow the base. And so, yeah, the second quarter, like a long volume was... RMB 63 million. And so, yeah. And we expect to do like an over 100 million in this quarter. We hope to maintain, yeah, a relatively high growth rate, like, yeah, for the foreseeable future, just because the base is still, yeah, small. And also you asked about the growth driver, I mean, the Philippines, and some other countries in South Asia, and also in Latin America, you know, they are large countries. Yeah, with population of over like 100 million. And also, the target customer base is very young, which we like very much. And so they have really strong demand for convenient credit. But the market certainly lacks Opportunities, yeah, means. So we are there to, yeah, leverage the capabilities we've developed in mainland China. And yeah, so I think this is a very, very big opportunity, frankly speaking, for us to do like credit tax. outside of mainland China in these large population, young markets where digital finance is still in very early days and booming.

Okay, understood. May I know the current customer acquisition cost for these countries, especially in the Philippines?

Now you have this number.

For our Philippine business due to the acquisition cost is based on our new customer acquisition strategy and based on the current data in this quarter about one person is around $5 or $10 per unit person. But I think in the second half year of this year, as you mentioned above, we want to look forward to our development growth, our Philippine business and other also business. So in the second half of the year, for our business development, we will in part my expense to our new customer acquisition. So with the acquisition rate of one person will be a bit increased in the third and the first quarter. But in this quarter, it's about $5 or $2 one person. Yeah.

OK. OK. Got it. Thanks again. Have a great evening. Yeah.

thank you the next question comes from dylan paul dylan paul md please go ahead uh yes uh can you hear me i'm gonna switch off speaker like you recommended um uh yes thank you uh uh so much uh this is dylan paul here private investor um myself and my friend dale who's very sorry he can't be here, have been following and invested in the company for a couple quarters now along, and we want to thank you all for this strong result. We'd like to, and also mention that we'd like to hear from any people listening to the call who are interested in sharing bi-directional insights, so please reach out to us via email or social media, which is easily found online. We have two questions. The first is related to the guarantee business. um and i will say that these questions actually uh that dale is the one who's most talented in in uh understanding and insights on the business so i won't be able to ask any further follow-up but i wanted to get them out there um uh for his sake uh the first is related to the guarantee business it seems like this is becoming a growing part of the business and we are interested in some additional color um Maybe you could speak towards how the guarantee contracts work in terms of sharing of credit risk and what that means for our return relative to the default rate on the underlying loans. And we also understand the accounting to be atypical for provisions. Could you maybe explain just how the accounting works or provide additional color And would it be helpful to show progression of loss provisions to write-offs in the quarter similar to how you do for contract receivables in the 10-K? And then the second, the final component, which again, maybe I should be separating things. Well, actually, let me stop right there. And then it sounds like, sorry, this is my first time doing a call before. It sounds like I can come back and ask that second question. I won't have any follow-up on the first question. because your answers, I won't be able to adequately process them the way Dale does when he's listening to them. So let me just stop right there with that first question there, or question.

Yeah, so now we can please, we'll try to cover that. Maybe I can suggest that, yeah, we can have a follow-on call to go into that. some of the details with your friend.

Okay, gotcha. All right, that's fine. And let me see then whether you have the same recommendation for the second question then, which is it's related to the parent controlling shareholder structure, which I guess we, or Dale in particular, but we have continued to be confusing for us. And I know we have asked about it before, but just wondering, is there any further color you can provide regarding credit ease and how the relationship works with YIREN, which again, I've been involved in that question before, and so I know you've addressed it. And then you mentioned this before, that he knows there's a large transaction in 2019. And this is maybe the new part that can be addressed. And nothing has happened since. But are you expecting any related party transactions coming up here, if you're able to speak to that? And thank you.

Not as substantial as the one you mentioned several years ago. Not even close. Yeah.

Okay. All right. Well, that's all of uh, my, our, our questions or Dale's, uh, more specifically. Um, and again, most importantly, um, thank you for that tour that you guys gave me while I was, um, in China and, you know, answering questions, uh, at that time and all your efforts that you've done with both, uh, myself and Dale to help understand the, um, the company. And we are currently very bullish and excited about everything you guys, uh, have accomplished so far.

Thank you. You are more than welcome to come back to see us. And so, yeah, we'll book a follow-up call to cover, yeah, all the details.

And again, Dale's a technical guy. That stuff confuses me, too. I can't follow him. So thank you. This concludes. Go ahead, please.

Okay, thank you for visiting our company. I hope you are coming again later. Okay, thank you.

And then this concludes our question and answer session and concludes the year-end digital conference call. If you have any further questions, please contact the investor relations team at year-end digital. Thank you for attending today's presentation. You may now disconnect.

Thank you all.

Thank you. Bye.