Yiren Digital (NYSE:YRD) Q1 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the year-end digital first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question at that time, you'll need to press star 1 on your telephone. I'd now like to hand over to your first speaker today, Ms Lydia Yu. Thank you. Please go ahead. Thank you and welcome to EARN Digital's first quarter 2020 earnings conference call. Today's call features the presentation by the Founder, Chairman, and CEO of Credit East, and CEO of EARN Digital, Mr. Ning Tang, CFO of EARN Digital, Mr. Zhong Bi, and CRO of EARN Digital, Mr. Michael Ji.

0:48 Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provisions, the U.S. Private Securities and Litigation Reform Act. of 1995. Such statements are subject to risks, uncertainties, and factors that can cause actual results to differ materially from those contained in any such statement. Further information regarding potential risks, uncertainties, or factors is included in UN Digital's filing to the U.S. Securities and Exchange Commission. UN Digital does not undertake any obligations to update any foreign statements, except as required under applicable law. During a call, We will be referring to several non-GAAP financial measures and supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for 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.

1:50 I will now pass it on to our CEO, Ning, for opening remarks.

1:55 Thank you all for joining our first quarter 2020 earnings conference call today. The first quarter of this year has been a challenging one as the coronavirus shocked the entire global economy. During this unprecedented time, our core businesses remained stable while we made substantial progress to diversify and Enrich our business lines and continue our business transition to China's leading digital personal financial service platform. We took proactive measures to ensure our business operating at a healthy level, giving customers the best service we can offer, making our own contribution to fight against COVID-19.

2:54 Now let me talk about our credit tech business. To maintain business resilience and to position ourselves for the long term, we were focused on three areas in our credit tech business this year. First, stabilize and improve risk performance. Second, invest in new areas of growth. And third, grow our institutional funding mix. I'll now talk about our actions in each of these areas. Our first priority is stabilizing and improving risk performance. In the first quarter of 2020, loan originations decreased 77% from prior quarter to RMB 1.8 billion.

3:50 as we proactively tighten the credit and decrease the business volume to control credit risk in light of the COVID-19. Our fast and timely response allowed us to operate at profitable level in the first quarter despite a challenging micro environment. Our second focus is on exploring additional opportunities and investing in new areas of growth. We have recently launched several new credit products to diversify our loan portfolio and to better meet a full spectrum of mainstream consumer credit needs.

4:37 The short, tenuous, smaller ticket size revolving loan product offers credit solutions for a wider range of online and offline This product has been very well received, growing more than 100% month over month. For this product, we will partner with large traffic channels like Xiaomi and OPPO Finance so that we will be able to significantly expand our business with diversified consumption scenarios, reduce customer acquisition costs, and improve operating efficiency as well as portfolio quality.

5:30 Last quarter, we mentioned that we will be rolling out auto loans this year as auto loans typically have a better risk profile than unsecured consumer loans. Our auto loan segment have shown a visible growth momentum since March. And in particular, our auto leasing business is estimated to reach RMB 1.5 billion in loan origination in the first half of this year. And we expect this product segment to be one of the main revenue drivers in the second half of this year. In the second half of the year, together with our channel partners, We also hope to build a consumption platform to enrich our credit ecosystem with a member-only online e-commerce platform.

6:27 Our third area of focus is on growing our institutional funding mix. We are pleased to report that our institutional funding mix has increased to 40% in the first quarter of 2020. are from 14% last quarter, and we expect this proportion to increase to over 50% in the second quarter this year. We are also actively expanding our institutional partners from banks to trust companies, other licensed financial institutions, and consumer finance companies. Next, on wealth management, our online wealth management business has seen strong growth. in particular for non-P2P wealth management products and services.

7:17 The number of non-P2P investors increased by 23% from prior quarter to 26,436 as of March 31, 2020. The AUA of non-P2P products increased 37% 67% quarter-over-quarter to RMB 1.7 billion. Average investor investment amount of non-P2P wealth management products has seen steady growth to 65K RMB, up from 48K RMB in previous quarter, driven by both increased investment amount for single product as well as multiple product selection representing good progress in our efforts on developing investor habits in using an asset allocation investment strategy.

8:23 For mutual fund products within wealth management, we witnessed strong demand during the first quarter with AUA increasing by 17% and with sales volume increasing by 30% from February to March 2020, driven by our new product offerings. We expect this growth trend to continue through the year. We have also been investing in investor education through a variety of online courses to help investors develop a long-term investment horizon. And we also noted a significant improvement in average AUA per investor in mutual fund products, which has increased to RMB 36.8K in March 2020.

9:19 With that, I will now turn the call over to our CFO, Jun, who will discuss our financial results for the quarter.

9:29 Thanks, Ning. Hello, everyone. For our financial update, I will focus on key items of our business operation and financial performance. And you can refer to the detailed financial results in our earnings release. Under the challenging operating environment amid the pandemic in the first quarter of 2020, we maintained profitability and a strong liquidity position. Loan originations for the quarter was RMB 1.8 billion a drop of 77% quarter-over-quarter, mainly driven by the COVID-19 outbreak, which heavily hit our offline lending business.

10:16 More specifically, due to the temporary closure of our physical branches as well as our call centers, which are based in Wuhan, we saw a significant drop in loans originated from offline channels as compared to prior quarter. Total net revenue was $1 billion, down 57% from previous quarter. Despite significant business volume drop during the quarter, our strong cost control and operation efficiency efforts have kept our business at a profit and a good cash position. The sales and marketing expenses reduced by 45%.

11:03 to RMB 616 million. Net profit for the quarter was RMB 19 million, representing a 95% decrease quarter over quarter. As of March 31, 2020, our cash and the cash equivalents remained stable at RMB 3.2 billion. We are expecting major business rebound and substantial growth in the second half of the year as our shorter-term, smaller ticket-size loans are quickly ramping up, along with other new credit products launched in the second quarter.

11:50 Plus, a comprehensive consumption finance ecosystem is being built with rich and diversified external partners on various platforms. On wealth management side, as of March 31, 2020, Yiren Wealth has served approximately 2.2 million investors cumulatively. And close to 221,000 investors currently hold an investment on our platform. The total AOA for Yiren Wealth reached RMB $32.2 billion as of March 31, 2020, with an average AUA per investor remaining stable at RMB $146,000.

12:47 For this quarter, our Account Management Service fee, which is mainly from our wealth business, was RMB $413 million. a relatively modest decline of 16% quarter over quarter. The allowance for contract assets has declined to RMB 143 million from prior quarter due to the overall lower loan volume and allowance was equivalent to 7.8% of the loan volume as compared to will be $588 million last quarter, which was equivalent to 7.4% of loan volume.

13:35 Meanwhile, contributions to the credit assurance program was at 12% this quarter to ensure adequate coverage. The decrease of 2% as compared with the last quarter was the result of shorter loan tenures and Titan Credit Control on new customers. Our credit assurance program remains adequately funded with a total balance equivalent to 10.5% of the total performing loans. With that, I will now pass it on to Michael, our CRO, for an update on credit risk.

14:21 Thank you, John.

14:23 Hello, everyone. For credit performance and the risk management, overall, early delinquencies increased in the first quarter and reached its peak at the end of March due to the pandemic situation before it quickly declined in April and returned to near pre-pandemic level in May. More specifically, 15 to 90-day delinquency rate stood at 8.9% as of March 31, 2020, compared to 4.8% as of December 31, 2019. However, the delinquencies dropped quickly moving into April thanks to our tightened risk policy and efficient risk management.

15:15 As of end of May, delinquency rates for 15 to 29 days 30-59 days and 60-89 days had already declined to 1.3%, 2.2%, and 2.1% respectively. And we expect delinquencies to further improve in June. Meanwhile, visible progress has been made in prioritizing our business toward higher quality customers. which was reflected in risk performance improvement. Looking at our vintage performance, we are glad to see essential improvement trend in 2019 and we expect a more substantial improved trend in 2020.

16:07 I will conclude my prepared remarks here and give it to the operator. Operator, please continue. Thank you. Ladies and gentlemen, if you'd like to ask a question, Please press star 1 on your telephone and wait for your name to be announced. Once again, that's star 1 to ask a question. Our first question comes from Alex Yee from UBS. Please go ahead.

16:45 Hi, good morning. Thanks for taking my question. So I have a couple of questions about your credit business. So first of all, it's on your traditional large ticket size and secure business. So could you just remind me what's your strategy on this specific loan product going forward? So we have seen your repeat customer borrowing for this quarter is almost zero. So going forward, are you going to completely have all run down this business. So what's the strategy on it? And also, will it be still offline or online? And second question is about your auto loan. So given you expect that it's going to be a major contribution to your loan presentation volume in the second half of this year.

17:37 So may I just ask for more color on it? So for example, what's the specific and many other product features like used car or new car market. And where was your customer acquisition channel? I guess it's still mainly offline, right? And what was the funding coming from? Where did the funding come from? And my last question is about your roadmap outlook for this year. So given you also have the sort of term tenure products, just wondering if you could give us some guidance on how you plan to maintain your loan mix in the near term and also from a longer term perspective, thanks.

18:27 Okay, thanks Alex. I'll try to answer your question and then maybe Bijun can add on any of the points that may be missing. So from the large ticket size traditional loan we have, Our strategy right now is that for the online business we're going to focus on the smaller size shorter tenure revolving loans as we mentioned in our remark and it's actually getting very good traction and then for the larger ticket size traditional business will continue to operate but mainly on our offline networks because that does have a unique and other credit screening process that helps us to improve the quality of the loan asset performance.

19:21 The reason that in the first quarter the repeat business was significantly lower is that first for the online business we're moving to the higher credit grade. So we significantly changed the customer segmentation. for the offline, as our CFO has mentioned. It was impacted by the pandemic situation, so the productivity really dropped significantly for the offline operation. So that's why the repeat business is pretty low in the first quarter. So in terms of the auto loans, we actually have two type of auto loans business. One is that we have been already are operating, which is the borrowers that you already have cars. So basically it's a credit enhancement business.

20:17 And that business is actually, as we mentioned, it's going to ramping up to $1.5 billion in the first half. This business has shown quite well credit performance. The ticket size and the pricing It's rather similar to the larger ticket size traditional consumer loans we have. 70,000 or 80,000 per loan, 24 to 36 months, and the fees are relatively similar. However, the credit performance is actually significantly better. If you think about The full-vintage car job is in the mid-single-digit level, so as you can see, it's quite a profitable business.

21:06 And from a funding perspective, we're working with licensed financial institutions to provide the funding for this type of loans. And then we are starting the second-hand car consumption loans, basically at the point of purchase. For this, as you know, it's also an offline-driven operation. We are building the team and getting very early good traction. The channels will be from the auto cars, cell centers. Also, we're working with some online auto channels that we hope to do online to offline conversions as well.

21:55 And then for this business, we're all being funded by institutional funding. Yeah. And then in terms of the loan mix towards the year, from online perspective, the shorter term revolving loan will be majority going through the year. and for offline you can think about the auto loan and the traditional larger ticket size consumer loans half and half. So that will probably reduce our overall loan tenure to more close to 20 months from previous more 30 month range as we go through building up the volume through the year.

22:52 Yeah. See if, Bi Zhong, you have any add to this?

22:58 Well, I think you answered fairly thorough. Just probably add one more point. Our funding partners, their risk appetite towards a longer tenure loans, significantly reduced towards, excuse me, lower tenure loans, so that's why represented by Dennis Raymark, average loan tenors in Q1 reduced to 22 months versus Q4. And we foresee the average loan tenant will continue to reduce. And so it will be easier for us to secure institutional funding. That's all I want to add.

23:42 Okay,

23:45 thanks. Okay, thanks. Very clear. So just wanted to add a bit of follow-up question. First of all, on the loan mix, both online and offline, could you also give us a color on how you're planning to split the two in terms of volume for this year? And second, about your short-term revolving loan, do you have an expectation about the current vintage loss rate on that particular product type? And lastly, on the Could you also give us an update on your P2P operations? You also have some funding coming from P2P in Q1. What's the current status on the compliance perspective?

24:31 To what extent do you expect that funding to continue in the rest of this year?

24:43 Okay, so I think maybe I can answer the online-offline split. It's around 50% from sales volume perspective, and it's probably going to maintain that way through the year. As you can see, the major part of the alcohol loans are classified in offline, so that's going to be an important portion, and plus the traditional larger-ticket-sized business will continue to recover the volume. I think maybe Michael can actually give comments on the credit performance expectation on the shorter-term loans, and later on we'll talk about the P2P operation and compliance status.

25:37 Thanks, Dennis. Let me take on the question for the shorter-term revolving loan credit performance. For this type of We are expecting the performance to be on par to our competitors. From the vintage performance perspective, it should be in the single digits because we have a pretty well-defined, well-established, and tightened credit screening process out of the acquisition. That is to ensure our credit performance will be at the market level. As to the next question, probably I will give back to Dennis about the P2P operation.

26:25 Yeah. I think from funding mix perspective, as we mentioned, we already reached more than 50% of the new sales volume funded by the institution. We have sufficient funding sources and partners that will be able to significantly increase that portion of the funding of our total business volume. However, at this current moment, our P2P operations are still operating with compliance with our local regulator, so we'll see how that part regulators requirement will evolve and then we can always adjust accordingly so that we can switch up our institutional funding to meet all the demands if we need to.

27:29 Right now it's more of our own judgment. We'll continue to operate both funding sources in parallel.

27:42 Okay, got it. Thank you. Once again, if anyone would like to ask a question, please press star 1 on your telephone and wait for your name to be announced. Our next question comes from Daphne Poon from Citi. Please go ahead.

28:15 Hi, good morning. Thanks for taking my question. So just two questions for me. The first one is regarding the loan volume. So just wondering if you can give any color in terms of what level of loan origination volume are you seeing or expecting in the second quarter? And also, would you have any worth guidance on a full year basis? The second question is regarding your account management fee. If I understand correctly, most of the fee is still coming from the P2P part that you basically get to earn the spread between your actual return versus the expected return that you are offering to investors.

29:09 So currently the fee rate is actually quite high. at around 5% annualized of your average AUM. So I'm just wondering if you continue to shrink your P2P business while ramp up the non-P2P part. Should we expect this free rate to decline? And if you can share, what is the free rate for the P2P part versus that of the non-P2P business? Thank you.

29:41 OK. So I will try to answer this question and Bijong can add in later on if anything points. So from the long volume perspective, as we mentioned before, we're still on our planned trajectory to recover and ramp up our overall long volume sales volume run rate. back to our 2019 average level by mid or later part of second half of this year. If you look at our 2019 quarterly run rate, it's probably around $10 billion, $8 or $9 to $10 billion level, so divided by three, that's the monthly run rate that we're targeting by the middle of the second half. As for a full year, we don't want to give a guidance, but you can use that math, try to curve it up. Then you probably can get an estimate assumption on the sales volume for the year.

30:53 However, you probably also want to look at the revenue side as we have more multiple streams of revenues now. That probably gives you a better sense of our business and skill and growth. In terms of account management service fee, yes, you're right. I think majority of that's still coming from the balance of the P2P amount. As we are shifting more from the P2P investors into more institution investors, Actually, the revenue opportunity is not missed. It's just that it's going to be captured from the revenue tick rate upfront.

31:46 So we're not missing that part of revenue. Of course, if our new loan origination volume does not catch up to the repayment schedule of the remaining loan balance. Overall, ending balance dropping definitely going to impact this portion of the revenue coming in. But we think, as we mentioned, we're in the progress of recovering the renry back to normal. You will see that catch up later on. And then from the non-P2P business, we are ramping up them nicely from both the sales volume as well as the AOA.

32:34 You have seen that AOA is actually growing very steadily, you know, quarter over quarter, more than 60%. And in terms of the take rate, I think the standard world's management product is a bit of, it has a bit of different scheme. You know, some of the products would be, you know, 0.5%, Some of the products could be 1%. In particular, if we were able to work with some of the product supplier on a strategic level, exclusive base, we can actually get up to 1%. But at the same time, I think we have mentioned, other than the bank wealth management products, mutual fund products, we're also introducing the insurance products to our wealth management clients.

33:29 and as you know that for the wealth management products the commission rate is rather high. We're actually expecting some good contribution from this business. So in the mix we will see whether overall on AUA basis we'll be able to reach the similar level. But longer term definitely we're going to see the non-P2P wealth management business to become a significant revenue contribution in 2021 and beyond.

34:04 Okay, understood. Thank you. Once again, if you'd like to ask a question, please press star 1 on your telephone. We've had no further questions come through. Just a final call. It is Star 1 if you'd like to ask a question. We have no further questions at this time. I will pass back to management for closing comments.

34:47 Okay. Thank you very much. That concludes the call. Thank you ladies and gentlemen that does conclude the call today. Thank you for attending. You may now disconnect.