FinVolution Group Q4 2023 Earnings Call Transcript

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March 18, 2024

There are 7 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for participating in the 4th quarter and full year 2023 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.

Operator

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

Speaker 1

Hello, everyone, and welcome to our Q4 and full year 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. Finbigroup.com. Mr.

Speaker 1

Tianjin Li, our Chief Executive Officer and Mr. Jiawen 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 are 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 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 U. S. Securities and Exchange Commission.

Speaker 1

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. Tian Zheng Li. Please go ahead, sir.

Speaker 2

Thanks, Jamie. Hello, everyone, and thank you for joining our earnings call. This is Jiejiejun Li, CEO of Vemolution Group. We are happy to speak with you today. When I became CEO 1 years ago, Simulution set a clear objective, become a leader in Fintech Industry, providing inclusive financial solutions for unserved borrowers and small business owners.

Speaker 2

In 2023, we advanced towards that goal with continued strong execution of our local focus global outlook strategy, adapting to the unique situation in different markets. I'm thrilled to report that we delivered exceptional progress on all fronts. Throughout the year, we maintained our robust momentum with the progressive expansion in China, while pursuing much faster growth internationally, where economic conditions were more favorable. We have achieved leadership positions in both Indonesia and Philippines, while also fortifying our success and high quality growth in China as we proactively adjust our strategies to suit China's dynamic economy. Performance wise, we continue to grow our business across the board despite evolving macroeconomic challenges.

Speaker 2

The cumulative number of borrowers we served in China, Indonesia and the Philippines has reached 30,000,000, growing at an accelerated pace with a net increase of around 3,000,000 new borrowers year over year. For full year 2023, our total transaction volume reached RMB194 1,000,000,000 and our outstanding loan balance reached RMB67 1,000,000,000 representing year over year increases of 11% and 4% respectively. Net revenue for the full year 2023 reached RMB12.5 billion up 13% year over year. Our international business grew exceptionally well in 2023, propelled by our effective global outlook strategy of pursuing rapid growth in overseas market. International transaction volume for 2023 sold to RMB7.9 billion and outstanding loan balance rose to RMB1.3 billion, up 85% and 58% respectively compared to the prior year.

Speaker 2

International market revenue increased to RMB2.1 billion, up 86% from full year 2022 Over the past year, international revenue contributions to total revenue increased significantly, rising to 17% in 2023 from 10% in 2022. Meanwhile, with our local focused strategy of pursuing high quality growth in China, we continue to achieve progressive growth domestically. Transaction volume increased to RMB186 1,000,000,000 while outstanding loan balance reached RMB66 1,000,000,000 up 9% and 4% respectively compared to the prior year. Revenue from the China market in 2023 further expanded to RMB10.4 billion, up 4% compared to the prior year. Another notable improvement was funding cost, which improved by 30 bps on a quarterly basis and by around 100 bps year over year.

Speaker 2

Our stable borrowing rates coupled with better than industry delinquency rates and enhanced operational efficiency enabled us to sustainably deliver higher ROA compared to the industry. We have also strengthened our commitment to small business owners supported by a prudent approach during this fragile and sometimes volatile recovery period. In 2023, we served over 811,000 small business owners and facilitate RMB47 1,000,000,000 of loans for them, up 80.5% compared with last year and representing 25% of total transaction volume in China. Finvolutions is a Fintech front runner with profound expertise across an extensive industry footprint. Part of our commitment to shareholders is to continue propelling the company's sustainable development and industry wide digital transformation through technology innovation.

Speaker 2

I'd like to share just a few of the pivotal technological advancements we made throughout the year. We amplified our investments in technological R and D, driving high quality growth, leveraging cutting edge technology. This significantly improved and optimized our operational process across all markets in which we operate. This includes increased R and D investment of over RMB500 1,000,000 in 2023 to strengthen different aspects of our technologies, such as the automatic speech recognition capabilities, greatly improving its grasp of Chinese dialects while boosting our chatbot's efficiency and accuracy. R and D is critical to our ongoing success and we continue to invest in our tech and our people.

Speaker 2

As of December 31, 2023, we proudly employed a dedicated R and D team of around 700 skilled professionals and have built a comprehensive IP portfolio that comprised 339 registered software copyrights and a successful filing of 179 patent applications including 53 invention patents already granted. Each of our R and D accomplishments enhance our offering to consumers and set new benchmarks for the financial services industry, supporting Finvolutions growth and industry wide progress. In recognition of these efforts, the Shanghai Municipal Commission of Economy and Information recently honored Finvolutions on its Shanghai 2023-1100 Leads for Software and IT Service Excellence. We earned prestigious rankings on both leads, securing the 18th 26th position respectively. These accommodations recognized our contributions to technology innovation and the advancement of the industry.

Speaker 2

Last but not least, ESG remains a top priority at Evolution. We diligently enhanced our integrated ESG program throughout 2023 with a focus on inclusion and giving back to society. For example, we have cumulatively offered RMB120 1,000,000 of interest free loans for eligible small business owners to help turn their dreams into reality. Our commitment and efforts have also been recognized by several renowned independent rating agencies with above average industry rating. We celebrate Pimolution's 16th anniversary in 2023, a milestone that affords us a glimpse of our future prospects as an enterprise grounded in sustained long term growth.

Speaker 2

Over the past 16 years, our business model and strategy have been validated by success in the face of multiple challenges such as the P2P transition, shift towards better quality borrowers and international expansion amid the pandemic. As an independent platform with limited resources, we are proud to have expanded and flourished in all markets in which we operate. Going forward, we will remain committed to serving borrowers in our existing markets, while increasing the pace of our international expansion by acquiring more licenses and expanding into additional countries and regions to deliver innovative financial services to more borrowers. Our local focus global outlook strategy will continue to guide us and drive our healthy and sustainable development as we embark on 2024. By leveraging our peerless technologies and operational advantages, we are confident to replicate our domestic and international success in new markets, unlocking value and making the company a world class Fintech enterprise, while consistently returning value to our shareholders.

Speaker 2

With that, I will now turn the call over to our CFO, Jiaoyuan Xu, who will discuss our operational and financial results.

Speaker 3

Thank you, Li, and hello, everyone. Welcome to our Q4 and the full year 2023 earnings call. Let's go through our key results for the Q4. To manifold of the length of our earnings call today, I encourage listeners to refer to our Q4 earnings press release for further details. Despite GDP growth of over 5% in 2023, China's overall economic environment continues to evolve.

Speaker 3

We leverage our various strengths to navigate the turbulence and conclude 2023 on a solid note. Our domestic transaction volume reached RMB50 1,000,000,000 for Q4, up 6% year over year and 2% sequentially. While outstanding loan balance grew to RMB66 1,000,000,000 up 4% year over year and 2% sequentially. Achieving growth in both metrics amid such soft consumer environment is a testament to our business resilience as well as our outstanding technology, innovation and operational excellence. We have observed several notable improvements as we move through the Q1 of 2024.

Speaker 3

During the recent new year, consumption activities picked up rapidly with 474,000,000 tourist trips nationwide, up 19% from the comparable period in 2019. Total tourism spending also climbed 8% to RMB633 1,000,000,000 from the comparable period in 2019, with air and train travel surpassing 2019 levels by 15% and 36% respectively, reaching new record highs. Box office ticket sales also rebounded and reached more than RMB8 1,000,000,000, setting a new record for the holiday period. Furthermore, several micro metrics exhibited varying degrees of improvement. For example, total social financing in January increased to RMB6500 1,000,000, up 9.5 percent year over year.

Speaker 3

Total retail consumption in December was increased to RMB4,000 355,000,000,000 up 7.4% year over year. We believe these signs reflect the down of New Year. Huyairein's consumer spending trends are shifting away from large ticket items, the property to small ticket items like travel related expenditures and other consumption activities. Amid these complex dynamics, we drove a modest yet encouraging recovery in our consumer credit demand through our ongoing refinement of borrower demographics and quality with the number of new borrower application increasing by between 3% to 5%. Cumulatively, we have served over 25,000,000 borrowers in China and the number of unique borrowers for the Q4 was 2,100,000.

Speaker 3

In addition, we further enhanced our credit risk assessment and fraud detection technologies during the quarter, which empowered us to navigate the macro headwinds and stabilize our asset quality. Our day 1 delinquency rate improved to 5.3% in December and further improved to 5.2% in February. We expect our vintage delinquency for the most recent 3 months to be 2.5%, demonstrating our business resilience. Boosted by the deployment of our advanced speech recognition technologies as well as the AI powered Chad Boss mentioned early, our loan collection recovery rate for the recent 3 months remained healthy at 87%. In terms of our funding partners, as our reputation in the industry continue to rise, we have further diversified our funding resources.

Speaker 3

The cumulative number of our funding partners has expanded to 94 financial institutions as of the end of the 4th quarter, with funding costs improving by around 100 basis points year over year. Moving on to our second growth driver. Our international expansion, which continues to outperform our targets and expectations. We impacted on our global expansion generally in 2018 and have been deeply investing in elevating Revolution's visibility worldwide ever since. Indonesia, our 1st overseas market, continued to record macroeconomic growth As consumer companies index remained high at 125 points in January, Full year sales of the motorcycles, the most popular model of the transportation in Indonesia, switched by 19.4% to 6,200,000 units year over year.

Speaker 3

Our 2nd overseas market, the Philippines, also ended 2023 with positive macro data. The Philippines will amount the fastest growing economics in Asia with 4th quarter GDP growth of 5.6%. Manufacturing PMI was 51 points in February and has remained above 15 points since September. Cumulatively, we have served over 4,800,000 borrowers in international markets as we continue to explore diversified consumer acquisition channels to attract new borrowers. The number of new borrowers for international markets increased by 20% year over year to 1,370,000 and the number of unique borrowers rose by 18% year over year to around 1,900,000 in 2023.

Speaker 3

International transaction volume for the full year 2023 sold by 85% year over year, reaching RMB7.9 billion. Transaction volume for the Q4 reached RMB2.25 billion, up 64% year over year. At the same time, our outstanding loan balance as of December 31, 2023 grew to RMB RMB1.3 billion, up 58% year over year. As we deepened our roots in Indonesia and fortified our reputation, the population of loans facilitated from local financial institutions in Indonesia increased to over 90% from 63% in the same period of 2022, reflecting our credit assessment models effectiveness as well as giving interest from our local financial institutions. The Philippines has also demonstrated excellent growth.

Speaker 3

During 2023, the number of new borrowers are in the Philippines grew by over 188%. This led to exponential growth in ACE transaction volume and outstanding loan balance, which surged by over 200% on a year over year basis, contributing around 20% of international transaction volume in the 4th quarter. Thanks to our proven record as a trusted lending partner, we have also secured institutional fundings in the Philippines and also have a strong pipeline of future institutional partners in PACE. These accomplishments have boosted our confidence as well as our visibility as we emerge as one of the top players in the Philippines. In 2024, we expect our Philippines operation to remain to maintain its robust high double digit growth momentum.

Speaker 3

International Business revenue in the 4th quarter progressively increased to RMB602 1,000,000, up 53% year over year and represented around 19% of the company's total revenue. For our full year 2020 perspective, international revenue reached RMB2.1 billion, up 86% year over year, as representing 17% of the company's total revenue, marking a significant achievement in our international development. This success has readied us to amplify our international expansion efforts with strategic initiatives such as refining borrower demographics, acquiring license and venturing into new countries. The outstanding progress we have made in our overseas markets across multiple operational and financial metrics serves as a springboard for our ongoing expansion and development. On a related note, we continue to build our international business presence and brand awareness on leading social media platforms through AIGC driven upgrades to our creative advertising campaigns.

Speaker 3

As of the end of the Q4, we had more than 1,000,000 followers on Facebook and our followers on TikTok grew at an accelerated pace to reach over 816,000, up more than 15% quarter over quarter. Social media will be a key means of reaching our target audience with our overseas marketing efforts as we enter new countries and debut innovative products. Now turning to our financial metrics. Driven by strong execution of our local focus, global outlook strategy, net revenues for full year 2023 increased to RMB RMB12.5 billion, up 13% year over year. While net income increased to RMB2.38 billion, up 5% year over year.

Speaker 3

As of the Q4, our leverage ratio, which is defined as the risk barrier loans divided by shareholders' equity, remained stable at 4.1 times, reflecting opportunities for growth when the macro economy in novelized. Our strong balance sheet and the liquidity position continue to enhance shareholders' confidence while providing us with optimal flexibility to execute our strategy. In particular, our cash position remains robust with over RMB7.9 billion of cash and short term liquidity as of the end of December 2023, representing an increase of 12% year over year. We believe our current cash position is sufficient to support our business expansion while increasing our return of value to our shareholders. Now let me briefly update you on our capital return program.

Speaker 3

Since 2018, we have continuously returned value to our shareholders in the form of share repurchase and dividends. Recently, our Board of Directors approved our 6th annual dividend in the amount of US0.237 per ADS, an increase of 10.2 percent year over year. For full year 2023, we returned a total around of US160 $1,000,000 to our shareholders, consisting of US62 $1,000,000 in dividends and US98 $1,000,000 through share repurchase, representing a capital return rate around 49% of 2023 net income. As of December 31, 2023, the company has cumulatively returned US605 million dollars to our shareholders. These actions underscore our consistent commitment to enhancing shareholder value.

Speaker 3

Before I conclude my remarks, I would like to provide some additional color on our business outlook for 2024. Despite the evolving macro environment, our business continues to thrive and progress. We are gaining substantial momentum as we focus on advancing our international initiatives, preparing technological innovation, expanding our healthy consumer base and optimizing our product profile. As a result, we expect our transaction volume in the China market in 2024 to be in the range of RMB195.7 billion to RMB205 1,000,000,000, representing an increase of around 5% to 10% year over year. In addition, we expect international transaction volume in 2024 to be in the range of RMB9.4 billion to RMB11 1,000,000,000, representing year over year growth of around 20% to 40%.

Speaker 3

That concludes my prepared remarks. We will now open the call to the questions. Operator, please continue.

Operator

We will now begin the question and answer session. If you wish to ask your question to management in Chinese, we ask that you please kindly repeat your question in English. The first question comes from Yada Lee with CICC. Please go ahead.

Speaker 4

I'll then add on the translation. Firstly, considering the current macro environment, I was wondering what adjustment have we done in the lending strategy, customer acquisition and the risk management? And with the help of these matters, how to view the asset quality going forward? And secondly, for the international branches, what are the growth and the profit outlooks for Indonesian and the Philippine markets respectively? That's all.

Speaker 4

Thank you.

Speaker 1

Okay, Yada, let me do the translation. From observation and study, China macro economy is still facing uncertainties, but expect to have a gradual recovery. Around the Q3 last year we have observed some negative impact on the industry which results in asset fluctuations. We have been quick with our responses. For example, we have reduced customer acquisitions from lower quality channels and step up our model updates from higher quality channels updating the models, tightening the approval rate and credit limit for borrowers who are more prone to economy uncertainty such as those with a higher level of debts.

Speaker 1

We have also closely monitor changes in our core metrics such as day 1 delinquency and loan collection recovery rates for the dispersed loans. And through the analysis of different borrower segments and title approval rates, we have ensured financial services for higher quality borrowers example those with lower debt levels remain intact. For post loans, I believe you are aware of the impact on loan collections preparations of telephone lines which are able to satisfy the needs of our post loan collection team. Although our loan collection recovery rate slightly declined from 89% to 87% we are still leading ahead of the industry. And with the implementation of these efforts we have seen positive results in December.

Speaker 1

For recent 3 months our day 1 delinquency rates improved to 5.3% from 5.7% in the 3rd quarter and further improved to 5.25% in February. While loan collection recovery rate remains stable at 87% with vintage delinquency returning to 2.5%. Our recovery should be ahead of the industry and we are confident to maintain industry leading asset quality with continuous improvement going into 2024. Okay, Yada, let me do the translation. Your question is on the whole international expansion and we will break down the explanation into different countries.

Speaker 1

For example, Indonesia has a new price cap in 2024. And our Indonesia operations in the Q4 has been impacted by local regulation change and since January 1, 2024 all our new loans has met regulator requirements and fully compliance. The pricing adjustments means that our borrowers cohort model data and rules have to undergo a series of adjustment. Based on our past experience we will need around 6 months to complete all these changes. And from the current outcome these changes has been positive.

Speaker 1

Example through adjusting our borrowers cohort out the risk metrics have improved by 20% reducing the impact of rates reductions and also from a customer acquisition perspective we have seen many small and medium platforms reducing their customer acquisition efforts which led to a 8% decrease in our customer acquisition costs and this further helps to reduce the impact of price reduction in Indonesia. And thus in the first half of twenty twenty four Indonesia operation focus will be on product adjustment and improving the quality instead of a rapid growth. And during the second half of twenty twenty four we will reevaluate our strategies based on macro situation. And in 2024 we expect Indonesia to achieve profitability. The profitability from the business view will be better compared compared to the financial view due to the rules of the accounting policies.

Speaker 1

In addition we have also disclosed some additional data points for our Philippines operations. Over the past few years Philippines operations has been developing very rapidly and from current observation Philippines country's economic and regulatory environment has been relatively stable. We will expect the rapid growth to continue into 2024 and we are currently number 2 in the segment of the market. We believe we can achieve our target of number 1 by the end of the year. Additionally, we expect that our Philippines operations can achieve profitability in the second half of the year under the relevant accounting rules.

Speaker 1

We have managed to achieve profitability in both Indonesia and Philippines and going forward we will consider to strengthen our investment in different types of licenses, diversify our operations and enhance our brand image to further increase our competitive advantage. We are also actively exploring new countries and these countries are not limited to Southeast Asia and we also consider other matters of expansion to speed up our international footprint.

Speaker 3

Okay. Thank you, Yada.

Speaker 1

Thank you,

Operator

Yada. The next question comes from Cindy Wang with China Renaissance. Please go ahead.

Speaker 5

Thank you for taking my call and I have questions here. So the first question is related to the customer acquisition cost. Since you are aggressively on the international market expansion, so what is your CAC target this year? And the second is related to the Philippine market. As Philippine market grows very strong in 2023, can you talk about the competitive landscape and how do you achieve to be a first number one market share position this year?

Speaker 5

And how would that contribute to the international market revenue for Vipshop? Thank you.

Speaker 1

Cindy, let me do the translation. We have been operating in the Indonesian market for quite a period of time in fact 6 years and we have a deep understanding of the market. Information fees continue to be the main matter to acquire better quality borrowers for us. Although the pricing cap has some impact on our operations, we have made adjustment to our models and the results have been very positive. For example, when we have higher quality borrowers we are able to increase our ticket size with longer loan tenure and the fee rates further improved with weaker competition.

Speaker 1

And we believe this trend will continue in 2024 and we will reevaluate our customer acquisitions strategies in the second half when the macro environment stabilize. For the Philippines, it is in a much earlier stage compared to the Indonesia market and over the past 2 years our marketing efforts are much more proactive and it has been pretty stable among the top and we believe this trend will continue into 2024. Cindy let me do the translation. We entered the Philippine market in planning planning and this is our 4th year of operations. Philippines has a population of around 130,000,000 and our target customer base is around 40,000,000.

Speaker 1

To date we have registered users of around 5,000,000 and our borrowers is around 740,000. There are currently over 100 players and the largest players are from the U. S. And local Philippines companies. We believe as a Fintech company from China our advantages is obvious and we will continue to leverage on our advantages and duplicate our success in China and Indonesia in the Philippines market.

Speaker 1

Around 20% of our transaction volume for the international market is coming from the Philippines in the 4th quarter and we believe this proportion will continue to increase in 2024.

Speaker 3

Okay. Thank you, Steve.

Operator

The next question comes from Alex Yun with UBS. Please go ahead.

Speaker 6

First on the Indonesian market, so after the pricing adjustment starting this year, how do management expect the impact on revenue and earnings? And you expect any further move from the regulators with regard to the timetable to further adjust down the pricing cap? And how will tackle the trends? And second, in terms of the total shareholders' return, we note the company has also speeded up the pace of share repurchase this year, bringing the total payout ratio to 48.5%. So how should we expect a more sustainable payout ratio going forward?

Speaker 4

Thank you.

Speaker 1

Alex, let me do the translation. We have actually shared some Indonesia data earlier and take rate we expect the take rate after our pricing adjustment to be around 10% and prior to the pricing adjustment it was around 13%. And from ROA perspective we expect it to be around 2 0.4% after the deduction of CAC and some other costs. And based on the current regulators advice there might be a further change in price reduction. We need to reevaluate this in the second half of the year.

Speaker 1

However, based on the current UEE, we believe our business will remain at a healthy level even if further price reduction kicks in. Hi, Alex. Let me do the translation. First of all, I would like to reiterate Ping Volition position. We are a global consumer finance technology companies.

Speaker 1

Our success has been validated in China, Indonesia and the Philippines with leadership position. In the recent years, as China market matures, our business enter into a stage known as high quality progressive growth. On the other hand based on our observation the international markets are still in early stages of development where market opportunities for growth is enormous and we are very confident to cement our success in Indonesia and the Philippines while expanding to more countries ensuring a rapid growth rate for our company. Our capital return program is closely in line with our company positioning. We hope rapid and healthy business growth can be the main way to create value for our shareholders.

Speaker 1

Over the last 3 years, we have proven this point. We have completed the business transition of our China business and expanded internationally with an average CAGR growth of over 44% and revenue growth of around 20%. And apart from this, we have also returned value to our shareholders through our capital return program. We began our dividend program and share repurchase program since 2018, the earliest in our industry. Over the last 6 years, we have cumulatively returned over US600 $1,000,000 to our shareholders equivalent to almost half of our market cap today.

Speaker 1

In 2023 we deployed close to US100 $1,000,000 to repurchase our shares and US62 $1,000,000 for dividend distribution, representing around 50% of net income for 2023 and a combined dividend yield of 11%. In 2023, our dividend per ADS was US0.237 dollars the 4th year of consecutive increase. And on the 5 years average, this increase in dividend was above 10%. And I would like to emphasize on this. For China ADR, there are not more than 6 companies with 5 years of consecutive dividend and consistent increase in DPS and we are one of these companies.

Speaker 1

And in summary, we are returning value to shareholders in terms of growth and a leading capital return program. Going forward, we will continue with this belief and let high quality growth remain as our core method to return value to our shareholders and concurrently maintain a leading capital return program. Regarding dividend, we are confident to maintain our track record and continue to deliver consistent increase in dividend for our shareholders.

Operator

As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Speaker 1

Thank you all once again for joining us today. If you have any further questions, please feel free to contact Ping Volusion's Investor Relations team.

Operator

This concludes the conference call. You may now disconnect your line. Thank you.

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