Yiren Digital Ltd.

Good day, and welcome to the year-end digital third 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 your telephone keypad, and to withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Kia Ha, IR officer. Please go ahead.

Thank you, operator. Good morning and good evening, everyone. Today's call features the presentation by the founder, chairman, and CEO of Credit East, our CEO, Mr. Ning Chang, and our CFO, Mr. Yu Ning Feng. There will be Q&A section after the prepared remarks. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the same hyper-provision of U.S. Private Security's Delegation Reform Act of 1995. Set statements accept risks, uncertainties, and factors that can cause actual results to differ materially from those contained in any set statement. Funding information regarding future risks, uncertainties, or factors is included in our filings 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 laws. 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 the non-GAAP financial measures and reconciliation to GAAP measures, please refer to our earnings press release. I will now pass it to Ning for opening remarks.

Thank you all for joining our earnings conference call today. I'm pleased to report a stable and healthy quarter with concrete business development and strategic exploration driven by our quality over quantity strategy. This quarter's results underscored our consistent focus on sustainable high-quality growth. Before I go into operational details, I'd like to share some highlights from this quarter. First, our financial services business made notable improvements in asset quality thanks to our continued focus on strong risk management and the borrower optimization. Second, We've been proactively exploring new online business models for our insurance division and have seen visible progress, driving an increase in sales of retirement-themed insurance products. As a tech-powered platform, Yiren Digital prioritizes the use of technology and the digital capabilities to enhance our business models. Our ongoing online business model is expanding from financial services to the insurance brokerage space. Third, ongoing investment in AI is already bearing fruit with proprietary AI applications now largely integrated into our daily operations, driving efficiency and improving customer experience. Altogether, These efforts are laying a solid foundation for the next phase of higher quality growth, one that will continue to drive value for our shareholders in the years to come. Now, let me go through our key business highlights. First, regarding our financial services business, the third quarter of 2024 saw continued growth with total loan volume reaching RMB 13.4 billion, a 36% increase year over year. The number of borrowers stayed relatively stable quarter over quarter at 150 million, a 24% growth compared to the same period last year. Meanwhile, our lending platform, Yixianghua, remains highly popular with monthly active users staying steady at around 4.5 million, a 52% year-over-year increase. Growth has been primarily driven by strong demand for our small revolving loan product and an increase in repeat borrowing from high-quality customers. As I mentioned earlier, we have enhanced the quality of our customer base by focusing on higher quality customers with stronger repayment capabilities and better risk profiles. And now those new customers are contributing to a growing proportion of repeat loans, becoming an important growth driver. Over 60% of the loans facilitated during the quarter came from repeat borrowers, up five percentage points from the previous quarter. As our efforts to upgrade our customer segments use success in phases, we are now focusing on increasing the repeat volume rate among existing customers while maintaining a balanced mix of new and returning customers. Furthermore, as a result of our customer quality upgrade and highly effective AI-driven risk management. We've seen significant improvements across various risk indicators, confirming the effectiveness of our approach. In the third quarter, our SPD 30 plus rate dropped by 32 basis points to a record low. As of September 30th, 2024, delinquency rates for the one to 30 day, 31 to 60 day, and the 60 to 90 day buckets fell by 10, 20, and the 30 basis points, quarter over quarter, respectively. Additionally, M1 recovery rates rose by 1.82 percentage points, reaching an all-time high. The shift in our borrower structure establishes a solid foundation for our sustainable growth. On the funding side, we made essential progress in expanding our funding partnerships. By the end of the third quarter of 2024, we had added nearly 20 new funding partners for the year. Meanwhile, our funding cost saw another 64 basis points reduction quarter over quarter. Moving on to our international business, our growth momentum remains strong. In the Philippines, both loan volumes and revenues posted double-digit increase quarter over quarter. We also began optimizing our customer base there while iterating our product offerings, and we expect these efforts to positively impact the profitability in the fourth quarter of this year. On our AI strategy, we made substantial progress with six proprietary AI systems now, supporting customer acquisition, customer service, asset management, and collections in our daily operations. I will now highlight several updates to demonstrate this progress. Firstly, for our domestic business operations. AI has significantly enhanced our collection and the quality assurance processes. As of the end of third quarter, 77% of day one overdue cases were covered by AI robots, resulting in labor cost savings of nearly RMB 2 million in Q3 alone. Meanwhile, To ensure the high professionalism of our services, we deployed 20 AI models for quality assurance in loan collections and eight AI models for quality assurance in customer service, with the collections models achieving over 96% accuracy. Additionally, we strengthened our AI talent pool by hiring over 50 professionals specializing in AI development, data science, and modeling, further enhancing our digital capabilities. Secondly, in our overseas operations, we fully developed and refined our AI-powered ID verification model in the Philippines, achieving an accuracy rate of nearly 95% in the third quarter, with performance now stabilizing. Moving to our insurance brokerage business, the overall industry has faced the profitability pressure due to regulatory changes, including lower interest rates and the policy of unified commissions and fees in reporting and underwriting. Despite these challenges, our total premiums this quarter recovered to be 1.35 billion. a 27% quarter-over-quarter increase. The rebound was partially driven by our online business initiatives. As I mentioned earlier, we've made progress in customer acquisition through social media, supported by AI-generated content. During the quarter, new policy premiums from social media channels contributed RMB 7.5 million at 7.1 million. This is a promising start. And we also built a dedicated team to focus on private traffic operations, driving efficient customer acquisition and conversion. Additionally, we are working on creating more synergies between our lending platform and insurance services by offering customized insurance products to our borrowers. and we expect to see growth from these efforts in the fourth quarter. In the consumption and lifestyle services segment, our total GMB was RMB 508 million for the quarter, a 10% year-over-year decline. As our customer base evolves, we are refining our product range to better serve our evolving demographic. Looking ahead, we plan to introduce more high-quality tailored products to meet their specific needs. In summary, our priority remains ensuring long-term sustainable growth. In times of external uncertainty and the market fluctuations, it is critical to stay focused on maintaining the quality of our business. We will continue to expand our online operations and enhance synergies across our businesses while further investing in R&D and increasing AI penetration. Furthermore, regarding our AI development, I would like to reiterate that we have been executing our AI strategy through the AI Lab, which incubates, invests in, and provides value-added services to AI startups. targeting enterprises, developers, and consumers. We have made several early stage investments this year, and we are exploring business cooperation with them. Additionally, I'm pleased to share that the commercialization of our proprietary AI systems is already underway, and we expect to see corresponding revenue reflected in our P&L in the near future. Now, I will pass it to Yuning, who will go through our financial performance.

Thank you, Yuning. So, hello, everyone. On this call, I will only focus on our key financial highlights. Please refer to our earnings release and IR deck for further details, both available on our website. First of all, we are glad to have delivered a healthy quarter with stable financial performance. In the third quarter of this year, our total revenue reached RMB 1.5 billion, up 30% year-over-year. In the financial service segment, total loan participation continues to grow steadily, reaching RMB 13.4 billion, up 36% year-over-year. This is primarily driven by strong demands for our small revolving loan products, and the rising repeat borrowing from our high-quality borrowers. Revenue from our financial service business increased 25% year-over-year to RMB $836 million, maintaining a healthy and steady growth rate in line with our quality-over-quantity business guideline, given external fluctuations. In the insurance sector, our growth Rating premiums were RMB 1.4 billion, down 5% year-over-year, up 27% quarter-over-quarter. The annual decrease was primarily due to a significant decline in our live insurance sales, resulting from regulatory changes and product adjustment. The quarterly rebound was driven by our online insurance sales. As our ongoing online initiative continues to progress, we expect further recovery in our overall insurance volume in 2025. So earlier this year, the guaranteed return on life insurance product was further capped at 2.5 NMV under the new regulation, following a rate reduction from 3.5% to 3% last August, which has further impacted overall profitability of life insurance sector in China. Moreover, the ongoing limitation of the unified commission and fees in reporting and underwriting regulation is adding pressure to commission rate industry industry-wide. Consequently, the third quarter this year revenue from the insurance segment, or RMB 85.5 million, down 68% year-over-year. In the consumption and lifestyle segment, the total GMV for this quarter is due to that RMB 508 million, a decrease of 10% year-over-year. The decline was due to already high product penetration among existing customers, and our strategic reduction in product offering as we move up market with our customer base. As our customer demographic evolves, we are strategically phasing out older product offering and developing new products tailored to their specific profiles and needs. On the expense side, sales and marketing spend increased 71% year-over-year to RMB $336 million. This annual growth was mainly fueled by the sweep extension of our financial service segment and enhanced marketing efforts focused on attracting new and high-quality customers. Research and development expense increased 287 year-over-year to RMB 151 million due to our ongoing investment in AI enhancement, technology advancement, and hiring of AI talents. Origination servicing and other operating costs decreased 16% year-over-year to RMB 206 million. This was mainly because the decrease in the insurance business volume, which resulted in lower channel rebates and associated settlement costs. GMA expense increased 50% year-over-year to RMB 80 million. The annual growth was mainly due to the increasing incentive bonuses and employee benefits. The allowance for the contract ads and receivables of RMB 95 million have 31% year-over-year. The increase was mainly driven by growth in our loan volume facilitated. Provision for contingent liability this quarter increased to RMB 272 million from RMB 11 million in the same period of 2023. This is a result of a continuous growth in loan volumes and our new risk-taking model, which requires substantial upfront provision according to the current accounting standard. However, this provision will be periodically recognized in the P&L as guaranteed service fee over time. In other words, there is a time difference in revenue recognition under this product model. However, from a loan's lifetime perspective, profitability will show better performance compared to loans under a non-risk-taking model. In the third quarter, the revenue from guaranteed service reached RMB 137 million, so which is five times that in the same period last year. Now on the bottom line, net income of this quarter was RMB 355 million, decreased 36% year over year. The decrease of net income due to three reasons. So firstly, as noted earlier, overall probability in the insurance business decreased Secondly, marketing expense and R&D expense rose as we continue to invest in attracting new high-quality borrowers from our financial service business and investing in developing our in-house AI capabilities. Thirdly, significant upfront provision has been set aside as we increase loan volume and our risk-taking models. Regarding cash flow, So as our loan facilitation business continues to grow and our loan balance expands, our funding sources, which are banks, financial institutions, et cetera, and associated guaranteed companies, request that we provide a strategic deposit, a common practice in the industry. This quarter, we made one-time deposit payment based on our current loan balance, resulting in a notable decrease in our operating cash flow. Approximately RMB 50 million net cash from our operations this quarter, but looking ahead, cash flow is expected to return to normal level next quarter. On the balance sheet side, our cash and cash equivalent remains strong at RMB 347 billion, though reflecting a notable decrease. This change related to our long-term investment in business expansion and potential license acquisition, which are still in progress. We will disclose more details once the deals are secured. Now, regarding shareholder returns. Firstly, for share buybacks, in the third quarter of this year, they allocated U.S. dollars 3 million to repurchase shares in the public market. As of September the 13th, 2024, the company has purchased approximately 5 million ADS in the open market for a total of approximately U.S. dollars $16.5 million, excluding commissions, under the 2022 share purchase program. Additionally, we distributed a cash dividend in October under our semi-annual dividend policy with a total payout ratio of 40% of our earnings for the first half of 2024. Lastly, on our business outlook, based on our assessment of current business and marketing conditions, We expect our revenue for the fourth quarter of 2024 to stand between RMB 1.3 billion to RMB 1.5 billion with a healthy net profit margin. This represents our current and preliminary assessment, which may be subject to change and uncertainties. This concludes our remarks.

So, we're open for Q&A session.

Thank you. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. We'll pause for just a moment to assemble our roster. And our first question today comes from Chris Wu with Look Capital. Please go ahead.

Hey, thank you, management. Thank you both for your sharing. Looking at the financial results, we have actually seen your loan volume by 3.5% quarter to quarter. And it's going a bit down from last quarter, which is 9%. And may we know why is there a slowdown? And then also going to Q4, have you seen any further pickup in credit demand and loan application in October and November? And any updates on your new customer acquisition strategy? Thank you.

Thank you. I'll take the first crack and Yuning can add to it, please. I mean, we see this demand for credit remains high, but it's very uncertain market conditions. And we are focused on this quality first, or quality over quantity strategy, which makes it a must to do greater risk management. That's where you see our results are very encouraging. Yeah, going forward, we will maintain this strategy. But we are also working harder on, yeah, bringing in more higher quality customers with, yeah, reasonable customer acquisition cost associated with it. Yeah. So Yuning, please add to it.

Yeah, thank you. So yeah, I think we are expecting that in Q4, we are still carrying on our strategy in our customer acquisition strategy. As we are 100% online business model, so in this year, we are in cooperation with TikTok, Douyin, and WeChat. and co-build an AI-driven real-time analysis model, which efficiently screen unqualified followers based on their credit score qualified borrowers. But as this year comes to an end, I think in Q4 we are expecting the cost of customer acquisition still a little bit high in this quarter as we see a lot of competition from the market and also to manage our risk level. So we will see how Q4 goes out. To summarize, I think we are still keeping a steady strategy and we're trying to acquire new customers at a reasonable price cost and trying to enlarge or expand our repeat borrowing pool. So that's the answer.

Yeah, the idea is we keep our risk management strategy really robust and try our best to grow. And we have confidence we will have relatively high growth in the quarters to come.

Thank you.

I hope that answers your question.

Sure, sure.

Do you have any further questions?

Yeah, sure, sure, sure. Can you hear me? Yeah, let me follow up. So it encourages you to know that we are maintaining a healthy momentum and also to care for the risk management at the same time. Perhaps the next interesting aspect to look at is AI. since we're seeing that you are increasing our investment in AI and hiring quite a number of professionals, could you explain what makes you competitive in the AI space, especially given that we have so many AI native companies in the market? And could you also tell us more about the AI systems that will be commercialized as you mentioned in your remarks? Thank you.

Thank you for the question. And, uh, So we are not an ILM company. We are an application of, yeah, AI company position. So we have like use cases. We have data, yeah, accumulated through all the years. Yeah, and so we are uniquely positioned, yeah, therefore to really build like, yeah, like credit related like models, insurance related models. Yeah, so this is, yeah, our, Edge as a AI application company. And as I reported early on, AI models, yeah, systems have been built across our business, yeah, like from and to like a backend. And so like customer acquisition, marketing intelligence, like risk assessment, like customer service, like collection, so on. Yeah. So many of the modules based on our preliminary market research, are very welcomed in the marketplace. Yeah. So we are working on monetizing these valuable assets. Yeah. Yuning, can you add to it?

Yeah, Tango. As we mentioned in the early calls, we have developed six major AI systems that support our business operations. I think some of them are quite mature in use in our day-to-day business. Some are in early development. So we evaluate which ones we maybe can use for our business partners. Some can be used in our peers, some are maybe in financial institutions. We're trying to, well, the system actually, when they are developed, are mostly in-house use, but we are commercialized to make it more useful in the market and trying to, well, develop business in our, especially in our peers and the financial institutions. I think we are going to see some progress in the near future, maybe in six months to a year.

Let me add two things, if I may. One is that, you know, finance related like exchanges, yeah, interactions, yeah, need to be in many cases very precise. So we are proven in developing and utilizing AI models and knowing that generative AI has certain shortcomings. So we use like REG and so on to mitigate that, but it's still certain models are still in the lab phase and they haven't been fully used. But many others are in greater deployment stage and ready for external commercialization. Secondly, I'd like to add that Yeah, the overseas markets can be quite, yeah, good places for AI. Yeah, because there is like China, five, 10, even 15 years ago. Yeah, so using AI, we can just leapfrog, right? Like in China, we've experienced like, you know, internet, mobile internet, big data, knowledge graphs, so on to, yeah, AI, different phases of AI until today, generative AI. But in, yeah, some overseas markets, like in the Southeast Asia, in China, South America, so on. Yeah. So these markets are really, yeah, ideal for AI deployment. Of course, we will be careful also in terms of risk management compliance, so on. Yeah. I'd like to just add this to it.

We hope that answers your question, Chris, and thank you very much for your question.

Thank you. This concludes our question and answer session. If you have any further questions, please contact the company's IR team for assistance. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.