Logan Ridge Finance Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 28, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for participating in the Q2 2023 Earnings Conference Call for Finvolutions 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.

Operator

Jimmy, please go ahead.

Speaker 1

Hello everyone and welcome to our Q2 2023 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company e mail alerts by visiting the IR section of our website at ir. Finvgroup.com. Mr.

Speaker 1

Tianjin Li, 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 and 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 Not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U. S.

Speaker 1

GAAP. For any 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.

Speaker 1

Forward looking statements involve inherent risks and uncertainties. As such, the company 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 US 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.

Speaker 1

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

Speaker 2

Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. This is Jiajun Li, CEO Finvolution Group, we are happy to speak with you today. Since our expansion into the Indonesian market back in 2018. We have continued to execute our local focus global outlook strategy in the Pan Asian region With under waiving determination, to date, we have cumulatively served over 28,000,000 borrowers in China, Indonesia and the Philippines.

Speaker 2

By integrating our local business focus with an international perspective, We are able to leverage our expertise and insights derived from diverse markets to drive growth and innovation within our organization. We expect this strategy to produce further benefits As China transitions into the post COVID era, recent July macroeconomic data Continue to be challenging with the pockets of improvement in the certain areas. However, market Microeconomic data from the SM markets in which we operate currently paints a more positive picture, reflecting growth across different operational metrics. Given these circumstances, We are adopting a strategy of progressive growth in the China market, while pursuing rapid growth in the international market. While we await the domestic macro environment recovery from the current challenges, We have been continuously investing in R and D.

Speaker 2

We have substantially enhanced our technology enabling us to streamline our processes, Upgraded our customer experience and achieved improvements across the various markets in which we operate. We are pleased to share that Finvolutions total transaction volume in the 2nd quarter increased to RMB47.3 billion, Well, our outstanding loan balance reached RMB63.7 billion, up 14 Percent and 13% respectively year over year. This growth validates our company's ability to Efficiency adapt to the challenging economic landscape. We are continuing to meet the needs of our customers across our markets in the Asian region. Technological innovation continues to be the core of our mission and Our annual event showcasing and cultivating technological talent and creativity.

Speaker 2

This year's event focused on the development of automatic speech recognition, ASR, To improve the technology's gripes of Chinese dialects and language, Aiming to increase Chidespot's efficiency and accuracy when communicating with customers from different regions. Our commitment to innovation was recently recognized at the 2023 World Artificial Intelligence Conference. Where the thesis we developed in the cooperation with Zhejiang with University of Zhejiang, Jokkmessage, unifying random joupling for graph Neural Networks was nominated for the Outstanding thesis award. Our investment in AI and machine learning began years ago With R and D spanning across different product categories such as self help services, chatbots, Data analytics and the credit risk assessment. Over the past several years we have been training our model 1,000,000,000 of dollars of transaction data, steadily increased their accuracy.

Speaker 2

We currently employ a fully automated loan approval process with all of our funding partners And our automated chatbot results about 80% of customer inquiries on average. We consistently embrace new technologies and deploy them into our daily operation To deliver a more personalized and tailored experience for our users, along with the use of chatbots In customer service and to address early days delinquencies in the loan collection process. We have functions and providing instant response for our users. In addition, we have incorporated AIGC Into our advertisement for our overseas business, increase our campaign's audience targeting accuracy And achieving greater visibility on leading social media platform such as Facebook, Instagram and TikTok. As a result, during the month of July, our followers on TikTok grew to around 700,000, While followers on Facebook and Instagram reached 967,000 and 200 and 200 and 20,000 respectively.

Speaker 2

Furthermore, we strive to advance our commitment to promoting financial inclusion during the quarter, Aligning our ESG efforts with this business goal through better borrowing rates, We further optimized our average borrowing reach in China to 22.3%, Ensuring our service are accessible and affordable for our borrowers. On a related note, I would like to share some updates on our ESG progress. We recently published our 2022 ESG report, the 5th in our company's history, demonstrating our dedication to transparency and sustainability. Responsible ES3 reporting allow us to showcase our strong governance practice And our actions addressing the environmental and social issue affecting our industry. We are also empowering us to design effective future initiatives.

Speaker 2

For instance, since the launch Of our entry free loan for eligible small business owners in China, we have cumulatively supported over 11,000 small business Owners in pursuit of their dreams. Our subsidiaries in the Indonesian and Philippine markets are also proactively Engaging in ESG work such as conducting cost management workshop to educate borrowers And launching a large scale Mook by Group tree planting project to improve people's livelihoods in their local community along other activities. We firmly believe that aligning our ESG And the business goal will ultimately create long term value for our stakeholders while achieving a positive Societal Impact. Before we move on to additional operational and financial metrics With our CFO, I'd like to share that Finvolutions celebrated its 16th anniversary during the Q2, A milestone that affords us to a glimpse of our future outlook as an enterprise with sustainable growth. As we have grown and built the business throughout the years, we have accumulated a suite of technologies, Secure sites and the capabilities that enable us to navigate and succeed in all the markets in which we operate.

Speaker 2

We will remain committed to our vision of leveraging innovative technology to make financial services better, Propelling Finvolutions long term sustainable growth along the way. With that, I will now turn the call over to our

Speaker 3

Thank you, Li, and hello, everyone. Welcome to our Q2 2023 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 Lee mentioned, the domestic macro environment Continue to be challenging with pockets of improvements in certain areas.

Speaker 3

The Official Manufacturing Purchase Managers Index came in at 49.3 points in July compared to 49 points in June and 48.8 points in May. According to data released by the National Bureau of Statistics on July 31, 2023, Meanwhile, total social financing data in July increased by just RMB528 1,000,000,000 below market expectation. Total retail consumption in July only increased by 2.5% compared with the same period last year. However, despite the challenging macro environment, we are encouraged by the strong operational and the financial Results we delivered in the Q2 of 2023. Driven by our stable and better quality borrower base, We achieved solid operational metrics in the Q2 in the China market.

Speaker 3

Cumulatively, we have served over Additionally, our China transaction volume reached RMB45.5 billion, while our outstanding loan balance reached RMB RMB62.6 billion as of June 30, 2023, both up 12% on a year over year basis. Boosted by our prudent approach to risk management with proven fraud detection technologies. We have maintained a stable risk level. In the Q2 of 2023, our day 1 delinquency rate was around 5.6 And the vintage delinquency rate is expected to be around 2.3% for the quarter. Finally, thanks to our loan collection team's impressive efforts, our loan collection recovery to maintain stable at around 90%.

Speaker 3

As we continue to Portion of category A and B borrowers in the China market further expanded to 80% of our total borrowers in the 2nd quarter, compared with 74% in the same period last year. Furthermore, Our transaction to better quality borrowers helped us to further optimize our funding costs during the quarter. We have also expanded our number of accumulative funding partners to 82 Financial Institutions And our pipeline of potential partners remains robust. All these operational improvements enable us to maintain a healthy take rate of around 3.1% during the Q2. As a company deeply committed to social responsibility, We continue to support small business owners during this challenging period.

Speaker 3

We have also noticed Our small business owners segment has been recovering at a healthy pace. Most of borrowers from this segment focusing on wholesale, retail, food and beverage industry. During the quarter, we sold around 459,000 small business owners and facilitated RMB11.5 billion of loans for them, representing an increase of around 11% compared with the same period last year and up 12% sequentially. Now I'd like to share some additional details on our international expansion efforts. Indonesia, Our largest overseas market recorded a continued growth in its macro economy during the Q2.

Speaker 3

Notably, on a monthly basis, the manufacturing PMI grew by 2.2 points to 52.5 points And the Business Confidence Index reached 99%. Indonesia economy continued to remain robust in the second Expected to maintain growth of around 5% in 2023. We anticipate that its domestic consumption will remain robust. We are excited about the progress we have made in our overseas markets across multiple operational and financial metrics. Cumulatively, we have served over 4,000,000 borrowers in Indonesia and the Philippines and continue to demonstrate significant growth in these countries.

Speaker 3

With the number of unique borrowers served during this quarter reaching a new high at 786,000, up 22% from the same period last year. International transaction volume slowed by 100% year over year during the Q2, reaching RMB1.8 billion, While we set a new record in our outstanding loan balance at RMB1.1 billion, up 131% year over year. Our operations in the Philippines have also exhibited stronger than expected growth across numerous operating metrics. On a year over year basis, the number of unique borrowers, transaction volume and outstanding loan balance all grew by several times compared with the same period last year. Alongside these impressive operational metrics, International revenue maintained its reverse growth trajectory reaching RMB503 1,000,000, An increase of 112% year over year and contribute around 16% of total revenue in the 2nd quarter.

Speaker 3

We have consistently strengthened our relationships with both local traditional financial institutions such as Bank of America and OCBC Bank as well as innovative Internet banks such as Bankiago and C Bank. Thanks to these furnishing partnerships and our partners' validation of our technologies and operational capabilities, Our percentage of loans in the Q2 facilitated by these institutions reached 65% compared with 39% in the same period last year. Going forward, We will further deepen our relationships with these institutions to increase our proportion of facilitation by local institutions and Driven by our ongoing investments in technology and our strategy shift towards serving bad quality borrowers, Our net revenues for the Q2 rose to RMB3.1 billion, up 15% year over year. Net income for the Q2 reached RMB590 1,000,000 up 1% year over year. Our leverage ratio, which is defined as risk bearing loans divided by shareholders' equity, remains stable at 4.3 times.

Speaker 3

During the times of uncertainty, our strong balance sheet and liquidity position continue to provide confidence To all our stakeholders and support the business growth for all our markets. In particular, our cash position remains robust with RMB8.2 billion of cash and short term liquidity as of the end of June 2023, representing an increase of 58% year over year and 6% quarter over quarter. We also remain committed to optimizing shareholder value through our annual dividend policy and share repurchase policy. We believe the current macro environment offers an attractive opportunity to return value to shareholders. And as such, during the first half of the year, we deployed around US46 $1,000,000 to repurchase our stock As of June 30, 2023, we have cumulatively returned $491,000,000 to our shareholders through our dividend and stock repurchase programs.

Speaker 3

Yes, Yixin. Our Board of Directors has also approved a new share repurchase program of USD 150,000,000 reflecting our strong commitment to enhancing shareholder value. On a related note, our Chairman, CEO and other senior management have also expressed their confidence in the company So personal shares repurchased totaling around 6130000 ADS in the first half of twenty twenty three. Given favorable macroeconomic Conditions in our international markets and the progress we have made across numerous operational metrics for our international business. The company has increased its international transaction volume guidance for the full year of 2023 to RMB7.7 billion, representing year over year growth of around 80%.

Speaker 3

Taking the current China macro environment into consideration, The company's 2023 guidance for its China market remains unchanged at between RMB189 1,000,000,000 to RMB205 1,000,000,000 representing year over year growth of between 10% to 20%. Before I conclude my remarks, let me provide some additional color on our business outlook for the Q3 of 2023. Despite some uncertainties in the macro environment, our business trajectory remains solid. We expect our transaction volume in China for the Q3 of 2023 to be around RMB49 1,000,000,000, representing an increase of around 10.4 percent year over year. We expect our transaction volume in international markets For the Q3 to be around RMB1.9 billion, representing an increase of around 73% year over year.

Speaker 3

In summary, our outstanding performance in the Q2 of 2023 underscores our dynamic Business model, technological know how and dedication to advancing our international initiatives. Entering into the second half of twenty twenty three, we remain focused on refining our risk assessment and management framework, Expanding our healthy customer base and optimizing our product mix. Looking ahead, We believe that we are well positioned to capitalize on the massive opportunities in both China and the international markets, Driving growth while creating greater value for our customers, shareholders and all of our stakeholders. With that, I will conclude my prepared remarks. We will now open the call to the questions.

Speaker 3

Operator, please continue.

Operator

We will now begin the question and answer session. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, we ask that you please kindly repeat your question in English. Our first question will come from Jada Lee of CICC. Please go ahead.

Speaker 4

Then I'll do my translation. Hello management. Thanks for taking my question. This is Yada with CICC. My first question today is about asset quality trends.

Speaker 4

Considering the current macroeconomic condition, what is the latest trend of Leading indicators like day 1 and inventory delinquency in July August and what can we expect going forward and how to affect our provision strategies? And my second question is related to the international business. And could you please give us more color on the updates such as the progress

Speaker 1

Hi, Yata. This is Jimmy. Let me do the translation for Alexis. Your first question is related to our risk assessment performance. As mentioned, our vintage delinquencies performance is around 2.3% and it has always been around at 2.3% levels over the past few years and our 30 days loan collection recovery rate is around 90% and over the last few quarters This metric has been relatively stable and our vertical delinquencies is at 1.68% which is also at a low level.

Speaker 1

From observation the current macro environment is relatively weak with recovery below expectation. And from observation the credit market is doing okay and we expect that it is going to maintain stable going forward With REIT's performance staying stable as well, we have been through multiple credit cycles including the COVID and the lockdowns and we have proved that Throughout all these cycles we have successfully navigated them and succeed after all these cycles. Hello, Yada. Let me do the translation for Alexis. As you know we are already in leading positions in the Indonesia and the Philippines markets.

Speaker 1

And apart from these two countries We are also looking at opportunities in other countries in the Southeast Asia and also looking at for high growth opportunities in countries such as the Africa and Latin Our business model is not only restricted to online lending. We are also looking at opportunities for example we are also looking at opportunities in Indonesia for offline consumption scenarios and as you know the population in Indonesia is young and we are looking with leading mobile phone operators In the Indonesian market to target these borrowers for mobile offline mobile phone consumptions.

Speaker 3

Okay, Yada. Do you have any further questions?

Speaker 1

Let me translate for Mr. Kim. As you know Finvolutions was established 16 years ago and we are very experienced in different business models such as Online, offline and have very good working relationships with different partners. Some of the business models might not work in China market, but These are very useful experience for us when we penetrate into other countries. As you know we are also not the earliest company to venture into overseas market but We are in leading positions in Indonesia and the Philippines because of our tech capabilities, our operational capabilities And also we have a huge base of talent pools and with these advantages we are able to leverage the capabilities and invest In our overseas market and going forward, we are confident further success in all these international markets.

Speaker 3

Okay. Thanks, Yada. And operator, please continue.

Operator

Our next question will come from Frank Zhang of Credit Suisse.

Speaker 5

Thank you, management for giving me the opportunity to ask questions. The first one is a follow-up on the international market. From a medium term perspective, for example, 1 year's time, how would you foresee the profitability of international market operations? And the second question is on domestic market. Do we have plans to further tap into prime customers with API less than 18%

Speaker 1

Let me do the translation for Alex's friend. Okay, in the midterm, right, Regarding our international market profitability, our international business is already profitable in the second quarter, But it is still relatively small compared to the China market. There are several reasons for this. Number 1, it is affected by the rapid growth For our international business as we need to invest continuously, for example, Our percentage of new borrowers in the Indonesian market is around 37% and also it has been affected by the deferred revenue because All these loans are conducted in installment loans. Hello Frank, let me translate for Alexis for this question.

Speaker 1

In the Q2 we further optimized our pricing to 22 point 3% from 22.7% in the Q1. As you have seen we are continually trying to explore to acquire better quality borrowers. Through our historical experience lower pricing help us to attract better quality borrowers and better quality borrowers We have a higher level of stickiness on our platform. And if you observe, we have also our ROA is also higher Compared to the industry average and in the Q2 our ROA from our reported earnings was about 3.7% And we have also optimized our funding cost structure by around 30 bps, with funding 30 bps in the 2nd quarter. And going forward

Speaker 3

Okay. Brad, do you have any other follow-up questions?

Speaker 5

No, that's all. Thank you very much.

Speaker 2

Okay, thanks.

Operator

The next question will come from Alex Yeh of UBS.

Speaker 6

So my question is on the shareholders' return. So we are happy to see Management announced a US150 $1,000,000 of share buyback plan, which So if we go back to your track record On this buyback, how should we consider your pace on deploying such a prototype going forward? Should we consider the $150,000,000 quota to be deployed over 2 year horizon as indicated by your And also, is there any target payout ratio if we take into account both your dividend and buyback?

Speaker 1

Hello Alex, let me do the translation. Our share repurchase and buyback programs began in 2018 And we already have a few years of track record and cumulatively we have returned about US260 $1,000,000 in the form of dividend to our shareholders And US230 $1,000,000 for share repurchases. In total, it is about US500 $1,000,000 return to our shareholders And the payout ratio if you calculate is around 30% to 40%. In terms of absolute amount we are ahead of our peers. In the first half Our buyback amount is close to RMB50 1,000,000 and the payout ratio for our annual dividend was 18.5%.

Speaker 1

So the payout ratio for 2023 is likely to be higher than our average historical years. And as long as the market conditions allows and is favorable we will continue to return value to our shareholders as validated by our past Historical performance.

Speaker 3

Okay. Alex, is it okay for you? Okay. Thank you.

Operator

And our next question will come from Thomas Chong of Jefferies.

Speaker 7

Thanks management for taking my questions. My question is about the competitive landscape in overseas market. Can management share your thoughts about the future outlook? And on marketing spending, given we talk about Facebook is one of our channel, can you comment about The customer acquisition cost in overseas versus domestic market? Thank you.

Speaker 1

Hello Thomas, let me do the translation. As you have known Our operations are mainly in the Indonesian and Philippines market and the macro environment in these countries are relatively positive. For example, in Indonesia, The GDP growth has been growing at over 5% for the last 7 quarters and in 2023 The GDP growth is expected to maintain at around 5%. The Philippines market is slightly slower compared to The Indonesian market, but the GDP growth is still growing at around 4.3%. And the reason why we Are able to maintain our leading status positions in these countries because we have deployed our technology capabilities and operational capabilities into these countries.

Speaker 1

And in the Q2 our number of unique borrowers has also reached a new high at 786,000 And we are constantly among the top 3 players. These markets Indonesia and Philippines are huge markets and are at early stages for us. So we will continue to invest and maintain leading positions into these countries as supported by our technologies and operational capabilities. Our efforts and capabilities has also been recognized by local financial institutions. For example, this can be validated by the increase in the proportion of loans funded by from 65% in the Q2 compared to only 39% in the same period last year.

Speaker 1

For sales and marketing, the amount we spent is around RMB80 1,000,000 has been invested into sales and marketing In the Q2 and apart from Facebook we are also investing into TikTok. We believe all these information which China It would be good chance for us to acquire our new borrowers going forward.

Speaker 3

Okay. Thomas, do

Speaker 7

Thanks management for taking my second question. My question is about AI. In the prepared remarks, we We have been investing in AI for many years and acquire AI in different scenario. Given LOM, these are such a hot topic in the Internet sector these days and people talk about LMM or industry LMM, just want to get some thoughts from management with regard to this area, Whether we are thinking of developing our own LMM or we are seeking a partnership with the top players? Thank you.

Speaker 1

Hello, Thomas. Let me do the translation for Mr. Tim. Honestly, The general big data model is not for a company of our size as it needs to be at a country level where the huge resources are required for development. Our focus is on the implementation of AI models into our operations into our daily operations in order in an attempt to increase our And also we will be looking at specific opportunities that are suitable for us for deployment into our business where we also consider to work with other partners to increase our efficiency.

Operator

And the next question will come from Cindy Wang of China Renaissance.

Speaker 8

Thank you, management for taking my question. This is Cindy from China Renaissance. So I have two questions. The first question is related to the overseas institutional funding. So we've seen the institutional funding Testing going up pretty quickly.

Speaker 8

So in the mid term, what's the percentage contribution will be Contributes from the institutional funding. The second question is related to provision. So we see the asset So can we talk about what's the difference between here and whether we have any write back in the second quarter? And how do we foresee the provision in the second half of this year? Thank you.

Speaker 1

Cindy let me do the translation. As mentioned we have around 65% of funds in 65% of the loans in Q2 was funded by local Indonesian partners in the Q2 and we expect this amount to be around 80% by the end of the year. Going forward, we still think that there's opportunity for us to further increase this proportion, but our next focus Will be on the funding cost where we need to do some optimization on our funding cost for the international markets. Going to the next question, When we take a look at the provisions, we need to divide into domestic and international provisions. The main reason is because our international business is growing at a Very rapid rate, this is the reason for the provisions levels to be higher.

Speaker 1

In the Q1 there was a write back And now if we take a look at the domestic China recovery, the recovery is still weak and slightly below So we don't have any plans for writeback at the moment, but all these will change when the economy is recovering at a faster pace And we believe there will be opportunities for write back going forward.

Speaker 3

Okay, thanks Cindy.

Operator

At this time, I would like to turn the call back over to the company for closing remarks.

Speaker 1

Thank you once again for joining us today. If you have further questions please feel free to contact me or my Investor Relations team. Thank you so much.

Operator

This concludes this conference call. You may now disconnect your lines.

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Logan Ridge Finance Q2 2023
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