FinVolution : First Quarter 2022 Earnings Conference Call Transcript

[FINV] - FinVolution Group

Q1 2022 Earnings Conference Call

May 31, 2022, 8:30PM Eastern Time

Officers

Feng Zhang, CEO

Jiayuan Xu, CFO

Jimmy Tan, Head of IR

Analysts

Yada Li, CICC

Frank Zheng, Credit Suisse

Alex Ye, UBS

Presentation

Operator: Hello, ladies and gentlemen. Thank you for participating in the First Quarter 2022 Earnings Conference Call for FinVolution Group. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and- answer session. Today's conference call is being recorded.

I will now turn the call over to your host, Jimmy Tan, Head of Investor Relations for the company. Jimmy, please go ahead.

Jimmy Tan: Hello, everyone, and welcome to our first quarter 2022 earnings conference call. The Company's results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the Company's email alerts by visiting the IR section of our website at: ir.finvgroup.com.

Mr. Feng Zhang, our Chief Executive Officer, and Mr. Jiayuan Xu, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session.

During this call, we will be referring to several non-GAAP financial 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 U.S. GAAP. For information about these non- GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties are included in the Company's filings with the U.S. Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Finally, we posted a slide presentation on our IR website providing details of our results for the quarter.

I will now turn the call over to our CEO, Mr. Feng Zhang. Please go ahead, sir.

Feng Zhang: Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. Due to the lockdown in Shanghai, our management team are dialing in from their homes, so please bear with us if we encounter any technical difficulties during the call.

We're happy to speak with you today, following the successful completion of another strong quarter against multiple headwinds. Since March 2022, Shanghai has been under lockdown due to the pandemic, and similar lockdowns have been imposed upon additional cities in recent weeks. Furthermore, other fluctuations afflicting 2021's macro environment persisted through the first quarter of 2022 and have affected certain aspects of our business operations. However, our strong technological foundation and strategic transition towards better-quality borrowers enabled us to flexibly navigate challenges and deliver solid, consistent first quarter results, highlighted by our eighth consecutive quarter-over-quarter growth in total transaction volume. In line with our expectation, we achieved record-setting total transaction volume of RMB39.7 billion this quarter, representing a year-over-year increase of 48% and a sequential increase of 2%.

Now let me share some other major achievements for the first quarter. As we relentlessly and skillfully executed our strategy to acquire better-quality borrowers, transaction volume originated for new borrowers surged to RMB6.4 billion, an increase of 14% year- over-year. Notably, our total outstanding loan balance also increased to RMB53.8 billion as of March 31, 2022, representing an increase of 66% year-over-year and 7% sequentially.

Thanks to our progressive shift towards better-quality borrowers, our ever-evolving credit risk assessment and our self-developed proprietary technologies such as Platform 9¾ and Merak visualized rules engines, we have stabilized our risk metrics at admirably low levels while continuously growing our transaction volume. Platform 9¾ is an algorithm learning system, which combines automatic model design, deployment and management into an one-stop platform that requires just 100 seconds to acquire relevant resources and implement a new model for credit risk assessment, increasing our efficiency tremendously. Merak enables us to swiftly make efficient and appropriate adjustments on complex and iterative operating rules, saving us over 50% in both maintenance cost and time.

Supported by our cutting-edge technologies and prudent management framework, our recent day-1 delinquency rate in the first quarter of 2022 further improved to 5.3% from 5.6% in the fourth quarter of 2021. However, since then, due to pandemic-related

lockdowns, this metric has increased slightly to 5.5%, but still within expectations. As our loan collection team is largely based out of Shanghai and spread across several cities, our loan collection recovery rate in May remained strong at above 90%.

Our delinquency rates below 90 days remained low at 1.56% compared to 1.61% in the previous quarter. Our vintage delinquency rates have remained stable for the past several quarters. However, considering the impact of the Covid resurgence in China, we now expect our vintage delinquency for the first quarter to be around 2.4%. In the meantime, we will continue to closely monitor the risk performance of both existing and newly- originated loans.

The impact of the pandemic is manageable for us, as we have been implementing preemptive measures such as strategically reducing loan transactions in riskier regions and tightening the approval rate for sectors such as food and beverage, which have been badly affected by the prolonged lockdown. Our ongoing transition to better-quality customers has been validated by the increased proportion of our category A&B borrowers, which accounted for 68% of our total borrowers in the first quarter compared to just 50% in the same period last year. Furthermore, the percentage of loans facilitated at or below IRR 24% increased to 84% in the first quarter, up from 78% in the previous quarter and from just 14% a year ago.

On a separate note, for borrowers who lost their short-term repayment capabilities due to Covid, our customer service team is providing additional assistance for them to help them tide over this difficult period. We are confident that our industry-leading digital capabilities and in-house developed technologies will empower us to overcome this challenging period while achieving regulatory compliance.

While sustaining our strong growth trajectory over the quarter, we also advanced our strategy to optimize our overall funding structure. As we continue to augment and refine our mix of funding partners, we have diversified our platform's funding sources while ensuring they remain stable, secure and ample. To date, we have cumulatively cooperated with over 60 financial institutions across different provinces and continue to cultivate a robust funding pipeline.

Alongside our substantial progress in our consumer finance business, we also maintained solid growth momentum in our operations aimed at empowering small business owners. During the quarter, we served over 507,000 small business owners across multiple sectors such as retail, wholesale and service industries, among others, representing an increase of 66% from the same period last year, while the segment's transaction volume increased 123% year-over-year to a record high of RMB9.8 billion, contributing 25% of total transaction volume for the quarter.

Our dedication to providing small-business financing is strongly aligned with the government's objective of promoting quality financing access for SMEs, especially in the aftermath of the global pandemic. Going forward, we will remain focused on our efforts to assist small businesses, reaffirming FinVolution's commitment as a responsible corporate citizen.

Turning now to our international expansion, which continues to gain traction, as in our domestic business to enhance our business stability, we have strategically implemented multiple measures such as the transition to better-quality borrowers, improving our product mix, offering attractive interest rates and expanding our partners' base in the international markets. This approach has been bearing fruit. The proportion of better- quality borrowers increased to 54% in the first quarter of 2022 from 28% in the same period last year. With the transition to better-quality borrowers, we have also further strengthened our institutional funding base in the region. And we are confident of securing additional funding as our business grows. With the Covid-19 situation largely under control in Southeast Asia, our transaction volume reached RMB0.86 billion in our international markets during the first quarter of 2022, representing an increase of 13% year-over-year. Of particular note, outstanding loan balances for our international markets totaled RMB0.36 billion, representing an increase of 44% year-over-year and 9% sequentially. We will continue to cultivate our partnerships with different players in the region and introduce new products and services to improve our offering mix. We are confident that these efforts will support our goal of becoming one of the leading players in the region.

Last but not least, I'd like to provide an update on our ESG performance, which is an important part of our growth and long-term value creation philosophy. This quarter's lockdown in Shanghai presented enormous challenges, as well as opportunities, for our team to develop effective ESG solutions. I am incredibly proud to report that our entire organization stepped up to meet and overcome these challenges with creativity, determination and grace. Our IT department quickly provided systems and software solutions to allow our employees to work from home to minimize work disruptions. And our procurement team and administrative team are working relentlessly to obtain supplies and provide ongoing assistance for our employees and partners who are immobilized by the lockdown. On a community level, to assist local authorities, our IT department developed a notification system to provide timely pandemic-related updates for residents in certain areas. Our employees also procured food supplies for volunteers stationed in the Song Jiang district. Finally, we reported last quarter that we received a low-risk ESG rating from Sustainalytics, a leading independent global provider in ESG research, ratings and data. Additional independent platforms, such as Refinitive and ESG Enterprise, have also included us in their ratings, providing our stakeholders with even greater insight into our ESG goals and accomplishments. We firmly believe that our long-term strategic plan, including financial, technological and ESG goals, will lead FinVolution to its next phase of growth and prosperity. As always, our efforts are inspired by our mission of leveraging innovative tech to make financial services better.

In summary, our excellent performance in the first quarter of 2022 underscores our strength and stability, as well as our team's ability to overcome any challenges. Taken together, our high-quality customer base, outstanding credit risk management system and strong overall execution form a firm foundation that will empower us to drive sustainable and quality growth in the long run and further strengthen our leadership position in the industry.

Going forward, we will remain dedicated to acquiring better-quality customers both domestically and internationally, while leveraging our technological capabilities to further refine our credit risk assessment and management framework to optimize our product mix. With these advantages, we believe that we are well positioned to capitalize on the massive opportunities ahead and create greater value for our customers, shareholders and all of our stakeholders.

With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our financial results for the quarter.

Jiayuan Xu: Thank you, Feng, and hello, everyone. Welcome to our first quarter 2022 earnings call. In the interest of time, I will not go through all of the financial line items on this call. Please refer to our earnings release for further details.

As Feng mentioned, we are encouraged that despite multiple challenges in the first quarter, we still achieved quarterly transaction volume growth for the eighth consecutive quarter while maintaining our risk metrics at a relatively stable level. With our transition to better-quality borrowers, coupled with strengthened relationships with funding partners and consistent technological enhancement, the loan approval rates from our funding partners rose to 76% in March compared to 62% in the same period last year. Our pipeline of potential partners remains strong, and we are confident to achieve meaningful improvement in our funding costs in the near future.

Driven by our consistent efforts in research and development, we have continuously enhanced our chain of technologies throughout our business operations, including customer acquisition and credit risk assessment, among other areas. These efforts have been validated by multiple improvements across our operational metrics.

Leveraging these strengths, our net revenues for the first quarter rose to RMB2.4 billion, an increase of 16% year-over-year. Even more encouragingly, we also delivered a strong non-GAAP operating profit of RMB602 million and maintained a substantial balance sheet with RMB10.8 billion in total shareholders' equity.

During the first quarter, our average borrowing cost remained stable at around 24.3% compared with 26.7% in the same period last year. Of particular note, nearly all loans originated for our new borrowers are under 24%, reflecting our ongoing commitment to financial inclusion and our growing ability to align with regulatory directives. We maintained our take rate for the quarter at a stable pace of 3.9%. Together with our partners' support and our constant efforts in optimizing operating efficiency, we are confident that we can continue to deliver solid results going forward.

With the proportion of our capital light model stabilizing at around 21%, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, remained stable at 4.1 times.

Our unrestricted cash and short-term liquidity position increased to RMB6.3 billion compared with RMB5.6 billion in the previous quarter, representing a sequential increase of 13%, further demonstrating the robustness of our balance sheet.