Yiren Digital (NYSE:YRD) Q2 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to Urien Digital's second quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Lydia Yu. Thank you. Please go ahead.

0:31 Thank you and welcome to the second quarter 2020 Earnings Conference Call. Today's call features the presentation by the Founder Chairman and CEO of Credit East and CEO of D&G, Mr. Ning Tang, CFO of D&G, Mr. Zhong Bi, and CRO of D&G, Mr. Michael Chee. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the state private provisions of the U.S. Private Securities Litigation Reform Act of 1995. and others. These statements are subject to risk, uncertainties, and factors that can cause actual results to differ purely from those containing any such statement. Further information regarding potential risks, uncertainties, or factors is included in the Indian Digital's value to the U.S. Securities and Exchange Commission.

1:18 Indian Digital does not undertake any obligation to update any foreign statements as that is required under applicable law. During the 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. I will now turn it on to our CEO, Ning, for opening remarks.

1:55 Thank you all for joining our second quarter 2020 earnings conference call today. With the pandemic still not far behind us and the changing market environment in the second quarter, we are making comprehensive progresses toward our business transition in our credit tech business and have achieved meaningful scale in our wealth management business growth. For our credit tech business, I will provide an update on our three key areas of focus this year, as mentioned on our last call. First, on product expansion.

2:41 Our new product initiatives are tracking very well. In connection to the launch of our new revolving loan product, Yixianghua, We have launched an e-commerce installment consumption platform in August to provide a more integrated service to our customers and establish a longer lasting relationship with them to realize more lifetime value. Yi Xianghua accounted for 13% of our total loan volume this quarter, growing over 500% quarter over quarter. On another hand, leveraging our vast offline service network coverage, we are ranking up auto loans nicely, achieving a 51% growth from last quarter.

3:39 In terms of customer acquisition strategy, we are building up a credit ecosystem, connecting consumption scenarios with our financial products and services. and we are rapidly expanding our partnerships with large traffic channels including Sina Weibo, 58, Xiaomi and many others are in the pipeline. Due to our channel partnership strategy, we have significantly cut our online customer acquisition costs and improved conversion efficiency. As of June 2020, online and others. Customer acquisition costs represent 3% of loan volume.

4:29 Secondly, on our transition to institutional funding, we have made great progress in repositioning our credit business by moving from a P2P funding model to a loan facilitation model. In the second quarter, 63% of loans facilitated were funded by institutional partners compared to 40% in the previous quarter, and we expect this proportion to continue to reach close to 100% by the end of this year with a diversified partner base. Lastly, on risk performance, with our prudent credit policy, ongoing effort to upgrade our borrower base and the new initiatives in loan rework and collection. We have achieved positive results on the asset quality of our loan book this quarter, and we noted a clear decline in delinquencies that's trending to pre-pandemic levels.

5:42 Next, on wealth management business. We are seeing very strong growth momentum, particularly for our fund products. As of June 30, 2020, the number of current non-P2P investors increased 20% from last quarter to 31,530, and the total asset under administration, or AUA, for non-P2P products increased by 48% quarterly to RMB 2.5 billion. More specifically, new investors for non-P2P products in Q2 increased by 62% from Q1, and AUA for bank products and funds increased 48% as compared with prior quarter.

6:39 Moreover, Average AUA per investor for non-P2P products also sees steady growth, with average AUA per investor for banks' fixed-income products exceeding RMB 100K and for funds over RMB 50K, which is well above industry average. In June 2020 alone, sales volume for fund portfolio products reached Triple-digit growth month-over-month to RMB 162 million. For banks' fixed income products, total AUA exceeded RMB 1.5 billion as of June month-end, and the demand continues to be strong in July and August.

7:32 We are also rolling out our insurance service offerings. and expect this to become a meaningful revenue contribution of our wealth management business toward end of this year. To better position Yiren Wealth in China's digital wealth tech market and better serve our investors, we have invested in two new strategic initiatives. This quarter, we completed the acquisition of a licensed insurance broker. To date, the brokerage has established partnerships with 20 insurance companies covering over 190 insurance products.

8:19 This will provide strong and vital support for us to diversify our product offering and expand our insurance business. We are also preparing for the launch of a new securities business in the third quarter which will provide our investors access to the capital and financial markets. Looking into the second half of the year, our main priorities for Yiren Wealth will be centered around customer acquisition, enhancing user management, including connecting each investor with exclusive financial advisors, diversifying product mix, and expanding our investment advisory services.

9:06 For customer acquisition, we aim to enhance our online customer acquisition capabilities through investment in new social media channels as well as offering free high-quality online introductory investment courses to attract users. Finally, I would like to announce changes in our management team. Let me introduce our newly appointed CFO, Ms. Na Mei. She has served as financial controller for Credit East Credit Business Unit since 2015, and she brings over 12 years of experience from PwC in finance, tax, internal controls, and consulting.

9:57 I would also like to thank Jun for his contributions to the company, and I wish him the best in his future endeavors. With our strategic focus to drive wealth management business growth, we also made several key talent hirings to strengthen our management team. Riemann Yau-Kang Feng will be joining us as Yiren Wealth COO. and he brings over 28 years of experience in marketing and brand management. In addition, we have also hired three highly experienced and senior personnel to manage our insurance, funds and securities business lines who have previous working experiences with leading financial institutions and technology companies.

10:53 I look forward to working with each of them in their new capacity. as Yiren Digital enters its new era of growth. With that, I will now turn the call over to our CFO, Jun, who will discuss our financial results for the quarter.

11:13 Thanks, Ning. Hello, everyone. For our financial update, I will focus on key items of our business operation and financial performance. You can refer to the detailed financial results in our earnings release. On the credit side, loan originations for the quarter was RMB 2.4 billion, representing an increase of 31% quarter over quarter, thanks to our strategic initiatives this year in diversification of our loan products. Auto loans and Yi Xiang Hua, our small revolving consumption loan products, now make up a major portion of our loan portfolios.

12:01 This quarter is representing close to 50% of our loan facilitated. On wealth management side, as of June 30, 2020, Yizhen Wealth has served approximately 2.2 million investors cumulatively. and around 195,000 investors currently holding investments on our platform. Total AUA for Yiren Wealth reached RMB 28.4 billion as of June 30, 2020. Total net revenue was RMB 0.8 billion in the second quarter, representing a decrease of 26% from previous quarter, primarily due to a Renminbi 245 million revenue shortfall relating to our pandemic customer care program, where we offered a payment relief for borrowers who were hit hard by COVID-19, as well as medical workers who fought against the pandemic to help ease their financial hardship and show our appreciation to the frontline workers.

13:24 We proactively granted a concession to over 50,000 cost borrowers in principal interest and the fees so that they can continue to make repayments but at an amount lower than the contractual amounts. This represents a one-time hit to our revenue. in an aggregated amount of RMB 245 million. However, we have already seen a significant recovery in this borrower's repayment behavior as there has been a two to three times jump in monthly collection volume since the implementation of the program.

14:12 And there is a good chance that the incremental recovery repayment amount will finally surpass the total release amount. Sales and marketing expenses was RMB 508 million this quarter, representing 21% of loan volume as compared to 34% last quarter due to better cost control. Allowance for contract assets was RMB 169 million This quarter, equivalent to 7% of loan volume. As compared to Yen Lim Bi, 143 million last quarter, which was equivalent to 7.8% of loan volume.

15:06 Net loss for the quarter was Yen Lim Bi, 232 million. As mentioned earlier, this is primarily due to customer care program waiving a total of RMB 245 million in principal interest and late fees for our borrowers this quarter. Contributions to credit assurance program was at 10.5% this quarter to ensure adequate coverage. Our credit assurance program remains adequately funded with total balance equivalent to 13.8% of the total performing loan.

15:54 On the balance sheet side, our cash position remains strong with 3.4 billion of cash and short-term investment as of June 30, 2020. On funding, we are actively transitioning from a P2P funding model to a loan facilitation model. Over 60% of our loan originations were funded by institutions this quarter as compared to 5% a year ago. And we expect this ratio to increase to close to 100% by the end of this year.

16:42 On employee compensation, to better attract and the retained top talents. The company adopted a new share incentive plan this quarter, which has a 10-year term and a maximum number of 80,560,000 ordinary shares available for issuance to prevent dilution to existing shareholders. Credit ease. will surrender for cancellation and for new consideration an equivalent number of shares. Lastly, I would like to provide an update on our share repurchase program, which was initiated in Q2 2018.

17:34 To date, we have already repurchased 368,686 ADFs. We plan to continue to execute our share buyback program to improve shareholder value. As we know the continual improvement in market and the business conditions, we are confident in the performance of our business for the future. With that, I will now pass it on to Michael, our CRO, for an update on credit risk.

18:13 Thank you, John. Hello, everyone. On credit performance, thanks to our continued effort in risk management, delinquency rates have shown a progressive improving trend. 15 to 90 days delinquency has decreased to 5.5% as of June 30, 2020, from 8.9% as of March 31, 2020. 15 to 90 days delinquency further decreased to 5.2% as of July 31, 2020, as a result of our strength and effort in tightening controls and improving borrowers' credit quality.

19:00 This quarter, our team focused on the following initiatives in risk management. We restructured our collection team and simplified organizational structure to increase the team's operating efficiency, as well as to transition our collection methods, emphasizing data-driven strategies and to be result-oriented. To mitigate the risk caused by COVID-19 and help customers win through the financial hardship, we have launched seven relating special collection projects. in Q2, including continued pandemic customer care programs, which offered payment relief for the customers who were hit by COVID-19 and health care providers who were fighting the disease.

19:56 These special collection projects helped us achieve a decline in NCL by over 10% as compared with projections at the beginning of the year. even facing the economic headwind. We will continue to strengthen our risk measurement and expect delinquency rates to further improve in the second half of the year. I will conclude my prepared remarks here and give it to the operator. Operator, we are ready for the Q&A. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel the request, please press the pound or hash key.

20:45 Our first question comes from the line of Alex Yeh from UBS. Please ask your question.

20:53 Hi. Good morning, management. Thanks for taking my question. So I have three questions here. The first one is about the recently lowered interest rate cap. So just wondering how would that affect your business? What is the current average pricing of your different products? And what's your future plan in adjusting this pricing in order to be compliant? That's my first question. My second question is about your current product mix. So you currently have three types of products offering, if I understand correctly, so they shall come with all bins. the autos and your traditional large tech side products. So can you give us a breakdown in terms of their contribution to the current quarter long volume? And also related to that, what is the current expected vintage delinquency for each of these products given they are now obviously under very different types of tenure and risk performance, I guess.

21:52 So and my last question is wondering if you could give us Any color on the revenue contribution from the non-P2P products, your wealth management business? Okay, thanks.

22:07 Sure. Thanks, Alex. I will start providing some answers to your question, then we'll have Michael and Joan answer some part of the remaining questions. In terms of the recap from the new decision by the Supreme Court, We're studying the details and also consulting with the regulator as it is more addressing the private lending. As you can see, we're rapidly transitioning from P2P funding into institutional funding partnership and how would the rest of industry to comply with the decision is still in discussion. However, we have also evaluated the feasibility or the financial impact if we were to transition our product in full compliance with the 27% IRR pricing perspective. Right now, if you look at our average product mix pricing for the recent quarters, we're about in the low 30 APR on IRR base. So there will be a bit of reduction on our revenue take rate. However, we believe with the lower pricing, we will be able to manage the credit risk cost better. That will give us some benefits.

23:38 And also, we expect in general the overall funding costs for the industry to trend down. and at the same time, as you can see, we're already making progress in terms of customer acquisition as well as the operation efficiency improvement particularly for some of our offline operations in terms of the overall cost control. So even though with the 27% IRR-based pricing, we're very confident that we'll have a sustainable profitable business model for our credit business. So in terms of the product mix, so right now in the recent quarters, the online portion of our business is around 20% or so, meaning our smaller, tiny and revolving type of loans.

24:34 And then for the auto loans, probably take about 50%. And then the rest of them are either our traditional offline larger ticket loans and also some of our small business loans that really in the partnership with the e-commerce transaction platforms. And so in terms of the delinquencies, I think we will have Michael to address that in terms of our delinquency expectations on these products. And I think your last question is about the revenue contribution from our wealth management products. We expect the total revenue coming from our non-P2P wealth management business becoming very meaningful by the end of this year, maybe close to $100 million, you know, maybe level.

25:29 And as you know, this is our recurring revenues that usually is more sticky. And once we have the customer acquired investment on our platform, we see a very high retention and actually even increasing their AUAs per customer base. So we're very encouraged by the trend that we're seeing. So maybe, Michael, you can give a comment on the vintage part.

26:02 Thank you, Danny. To address the question about the vintage delinquencies, as mentioned in the prior conference call and plus this one, we have employed a very prudent risk management approach to carefully manage our credit risk, especially on the new acquisition loans. We have employed a strategy in the past quarters to pretty much improve our customer credit quality. Make sure we will focus on serving the customers with better credit quality. All of these approaches will help us to reduce our vintage sales.

26:49 And we do have the expectation we will see the improvement over time. And the effort is still continuing. So this will be a continued effort regardless we are facing the new rate cap policy or not. This is just our steady approach and strategy. Hopefully that will answer your question.

27:20 Okay, thanks very much. Our next question comes from the line of Yisan Wang from CLSA. Please ask your question.

27:34 Thank you. Thank you, management. So I have two questions. So we mentioned that toward the end of this year, almost 100% of our loan ordinations will come from financial institutions. Just wondering, what is our current strategy on P2P? So does that mean P2P products will no longer support the new loan growth down the road? That's my first question. And the second question is our cooperation with insurance companies. So are we still cooperating with them? And do we see some pressure from companies like PICC Group that they mentioned to decrease this business? Thank you.

28:19 Yeah, thanks for the question. Yes, that's correct. We're in the transition into... the loan facilitation business model following the industry trends that most of our business will be funded by the institutional funders' fundings towards the end of the year. Of course, we're also working with the regulator with their guidance in terms of the overall transition schedule. And from the insurance partnership we had previously, Right now, for all the partnership relationship, we have institutional funding partners. We no longer need the insurance design anymore. So right now, that business is no longer carry on. So we're basically working with all the institutional partners directly in terms of the funding sources.

29:26 Got it. Thank you. Sure. Once again, for those who would like to ask questions, please press star 1 on your telephone and wait for a name to be announced. Again, it is star 1 to ask for a question. Our next question comes from the line of Daphne Poon from Citi. Please ask your question.

29:50 Hi, management. Thanks for taking my question. So just two questions for me. So first one is regarding your online loan volume. I noticed that it has dropped a lot over the past two quarters and also on a QQ basis. So just wondering what's happening with your online customer acquisition strategy there and do you expect that the online portion to continue to decline and whether you are shifting your focus more towards the offline channel? and second is regarding your customer care program you mentioned earlier just want to better understand so first like how many borrowers were receiving this kind of payment relief under this program and is it like you waive the entire outstanding principal and interest, or is it just a portion of that?

30:51 So if you can explain more on that part, it would be helpful. Thank you.

30:57 Sure. I will answer the first question, and maybe Michael can provide more color on the customer care program-related questions. So, yes, the percentage mix of online business volume dropped a little bit in the recent quarters. I think the meaning is that As we transition from the traditional larger ticket, longer tenure online loans into more revolving type small size and shorter duration loans, we are taking a bit of a careful approach. However, you can see that the volume is actually ramping up quite nicely. and we expect this new online product to continue to grow towards the end of the year and becoming a meaningful portion of our business, probably reaching a third at least in terms of sales volume going forward.

31:51 And for supporting this business, as we have mentioned, we're both working with a large internet traffic platform in the partnership perspective that was very efficient of customer acquisition cost. And also we're rolling out and others. We have a better understanding of how their spend and how their credit quality is evolving. So we expect this to become a very meaningful part of our new business initiative for our online business operation. So maybe with that, Michael can give more color on the customer care program.

32:45 Sure, thank you. To the customer care program, cumulatively, we have over 100,000 customers benefited from this payment relief program and received very good response. and a good customer experience and a good customer relationship building. To the question about the principal waivers, actually the program includes waiver of principal interest and the late fees, as Mr. Zhong mentioned earlier. But for the principals, we don't waive the entire principal. It's just a portion of that.

33:33 Will you be able to share, will you be able to disclose roughly how, what percentage of principal?

33:44 It depends. It depends. It's a mixed strategy. It depends on cost per situation and the loan itself. It's really a pretty complicated strategy. There's no, you can't You can't view it as just a straight line, a simple number. It's a very well-defined, very well-designed strategy.

34:14 Okay, understood. Thank you.

34:16 Yeah, maybe just one thing to add on that. As we mentioned in the prepared remarks, after the implementation of this policy, we already see a very encouraging sign of the For those who would like to ask questions, please press star 1 on your telephone and wait for a name to be announced. Again, it is star 1 to ask for questions.

35:06 There's no more questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

35:16 Okay. Thank you. Bye. Thank you.