Waters Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 22, 2024

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Limited First Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. After Please note this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Ms. Lu Zinyan, the company's Head of Board Office and Capital Markets.

Operator

Please go ahead, madam.

Speaker 1

Thank you very much, operator. Hello, everyone, and welcome to our Q1 2024 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.

Speaker 1

S. Cho, who will provide an update of the macroeconomic trends and the recent developments and strategy of our business. Our Co CEO, Mr. Greg Yip, will then go through our Q1 results and provide more details on our business priorities. Afterwards, our CFO, Mr.

Speaker 1

David Troy, will offer a closer look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward looking statements. With that, I'm now pleased to turn over the call to Mr. Y. S.

Speaker 1

Cho, Chairman and CEO of Lubac. Please.

Speaker 2

Thanks for joining today's call. In the Q4, we witnessed improvement in our early risk indicators. However, high quality loan demand from small business owners remained subdued. While our exposure steaming from our 100% guarantee model means we'll be prudent and patient in new business development. Our emphasis has to be on quality over quantity.

Speaker 2

Before diving into business performance, let's take a look at the macro environment. Overall, the environment showed signs of improvement during the Q1. The Purchasing Managers' Index, or PMI, which measures prevailing trends in the manufacturing and service industries, both trended positively. The index increased from 40 9 in December, December 2023 to 50.8 in March 2024 for manufacturing, while growing from 49.3 to 52 for services. Despite improvement in the macro environment, the SCBO segment recovered at a relatively slow pace.

Speaker 2

For example, the SME Development Index published by the China Association of Small and Medium Enterprises was 89.3 for the Q1 of 2024 compared to 89.1 for the Q4 of 2023 and 89.3 for the Q1 of 2023. Now regarding business development. As discussed in our Q4 earning call in 2023, we completed 5 major derisking and diversification actions, including 4 mix changes and 1 business model adjustment. Thus far, these actions have yielded signs of improvement in asset quality. Although, we believe operational prudence remains critical to ensure long term growth and sustainability.

Speaker 2

During the Q1, total new loan sales decreased by 15.6% year on year, mainly due to weak quality loan demand from SCOs and our own emphasis on prudent operations. As we shifted our focus from SCBO loans to a more diversified approach, Newer sales of our consumer finance business grew to RMB20.3 billion in the first quarter, representing an increase of 46% year over year. On the other hand, new sales of Puyi Business continued to face pressure from a lack of high quality SEO loan demand and decreased by 35 0.5% year over year. As mentioned previously, we successfully completed expansion into our 100% guarantee business model for the Pohu business by the end of Q3 2023. On balance sheet loans were enabled by our consumer finance subsidiary as on balance sheet loans were enabled by our guaranteed company under the 100% risk bearing business model.

Speaker 2

As a result, our risk bearing increased from 39.8% of the total outstanding balance as of the end of 2023 to 48.3% as of the end of the Q1 20 24. While the switch to 100 percent guarantee model will exert a positive impact on our take rate, As it elevates the effect of elevated CGI premiums, our profitability will take longer time to recover due to higher upfront provisioning. Now let's turn to asset quality. After successful execution of our de risking adjustments to the mix of segments and products, region, channel and industry, together with improvements in the macro environment and the removal of short term relative impact caused by restructuring of our direct sales and branches. We witnessed improvement in our early risk indicators in the Q4.

Speaker 2

The C2M's reflow rate for PULI business decreased from 1.2% in the Q4 last year to 1% 1.0 percent in the Q1 this year. The NPL ratio of our consumer finance launch also remained stable. While we are pleased with such improvements in asset quality, we are taking a patient and prudent approach to ensure this success is sustainable. In terms of broader strategy, we are pleased to announce that we completed acquisition of Ping An One Connect Bank in early April as part of our strategic initiative to leverage our strong licenses. These licenses have the potential to underpin a more expanded set of service offerings, allowing us to provide more dynamic services and to further diversify our business.

Speaker 2

I would also like to provide an update on the special dividend arrangement that we announced earlier. On March 21, we announced a special dividend plan of US2.42 dollars per ADS or US1.21 dollars per ordinary share. This special dividend remains subject to shareholder approval at the Annual General Meeting or AGM, which will be held on May 30, 2024. The record date for the Annual General Meeting is April 9, 2024. To sum up, in the Q4, we encountered preliminary improvements in asset quality, which demonstrate that our de risking and diversification initiatives are starting to bear fruit.

Speaker 2

Despite this, we remain we maintain a prudent approach in our operations as we see continued weakness in high quality SGL loan demand. Last but not the least, our CFO, David, will design for personal reasons with an effective date of April 30. David has been with the company for nearly 6 years, and we thank him for his tremendous contributions to the company. We have appointed Zhu Peiqin as our new CFO. We assume the CFO role effective from April 30.

Speaker 2

Pei Qing has extensive experience in finance industry, especially in audit and financial management. We look forward to his onboarding and future contributions. I will now turn the call over to Greg to share more details on our operating results.

Speaker 3

Thank you, YS. I will now provide more details on our Q1 2024 results and our operational focus for this year. Please note all figures are renminbi unless otherwise stated. Let's begin with an overview of our Q1 performance. During the quarter, ongoing weakness in demand for high quality loans from SVO, small business owners, combined with our continued emphasis on operational prudence, weighed on new loan sales.

Speaker 3

New loan sales in the Q1 were $48,100,000,000 representing a 15.6% year on year decline. Among the total new loan sales, 42% were contributed by our consumer finance business. This is up from approximately 24% in the same period last year. Revenue in the Q1 was $7,000,000,000 a decrease of 30.9% year over year. The decline was mainly due to the decreases in our new loan sales and outstanding loan balance and was partially offset by our increased take rate as more of our book comes from the 100 percent guarantee bottle.

Speaker 3

Our net loss for the Q1 was $830,000,000 mainly due to increased tax associated with the special dividend. On a pre tax basis, Luplax was marginally profitable in the Q1. Earnings before tax were 4 $47,000,000 in the Q1 of 2024, which compares to $1,100,000,000 in the same period for last year. For this quarter, pre tax profitability remains relatively under pressure as a result of declining loan balances and new business being loss making in the 1st 12 months due to upfront provisioning under the 100 percent guarantee model. Partially offsetting these pressures were continued improvements in cost structure, reduction in credit costs and continued strength in our later stage recoveries.

Speaker 3

As Wyeth mentioned earlier, we witnessed the impact of our de risking and diversification initiatives on our asset quality during the Q1 of 2024. I will now walk through our operating metrics and how they've evolved in light of these strategic changes. First, in terms of product mix, we saw our consumer finance segment continued to grow. In the Q1 consumer finance sales accounted for 42% of new loan sales, up from 24% in the same period last year. Concurrently, the proportion of unsecured loans and secured loans decreased to 37% 21% respectively from 48% 28% last year.

Speaker 3

In light of these changes, we have seen a gradual ongoing shift in our balance mix. Consumer finance balances as a percentage of our total balance reached 14% as of March 2024 compared to 6% at the end of March 23. Meanwhile, the proportion of unsecured loans decreased to 64% from 72% at the end of March 2023, while the proportion of secured loans has largely remained flat. In terms of our business model, we continue to build up a roster of new loans under the 100% guarantee model. As we previously mentioned, this has reshaped our portfolio mix and increased our risk bearing.

Speaker 3

As of the end of the Q1, 26 percent of Puhue's loan balance was enabled under our new 100 percent guarantee model and our risk bearing by balance has grown to 48.3% as of the end of the first quarter, up from 39.8% as of the end of the Q4 3. We also kept our focus on prioritizing sales in more economically resilient regions. In terms of our channel, we maintained our emphasis on excellence within the direct sales team, which continues to be our major sales channel and contributes majority of our new loan sales. Next, our asset quality. Our overall C2M3 improved to 1% from 1.2% in the 4th quarter of 2023.

Speaker 3

This was mainly due to improvement in the macro environment, removal of temporary negative impact from our geographic and direct sales restructuring in the Q3 and the vintage runoff as we build up a new book. While we observed improvement in C:M3 ratio during the Q1, we remain cautious about the future sustainability of this trend. Given this and considering our heightened risk exposure, we will continue our prudent strategy of prioritizing quality over quantity during 2024. Now let's take a more detailed look at our unit economics of the Pujue business. During the quarter, funding costs remained stable.

Speaker 3

In addition, our overall APR decreased slightly to 19.7% as we maintained our focus on higher quality customers. Our take rate based on loan balance has risen to 9% from 7.3% for the Q1 as loans under the 100% guarantee model comprises a slightly higher percentage of the total loan balance. While we anticipate that loans under the 100 percent guarantee model will be lifetime profitable, it is important to note that these loans may incur accounting losses in their 1st calendar year due to a standard but higher upfront set of provisions. Under our projected 4, our guarantee subsidiaries leverage ratio was 2.4 times, mainly driven by the increase of our guarantee balance associated with our increased risk exposure and the decrease of net assets due to the distribution of the special dividend. Our consumer finance capital adequacy ratio stood at approximately 15.1%, well above the required 10.5%.

Speaker 3

As for our balance sheet, we hold net assets of $92,800,000,000 with our cash at bank balance amounting to $39,400,000,000 at the end of the quarter. I'll now turn over the call to David, our CFO, for more details our financial performance. Thank you, Greg.

Speaker 4

I will now provide a close look into our Q1 results. Please note that all numbers are in run rate terms and all comparisons are on a year over year basis unless otherwise stated. As Weiss and Greg have mentioned, our performance was still impacted by the broader economic conditions that have been exerting pressure on the small business sector throughout this period. While strategically shifting to a 100% guarantee model with higher take rate, higher quality customer segments and more favorable geographical regions, we opted to forgo some of our business scale with the aim of enhancing the quality of our future loan portfolio, which we believe it is important for the long run for the company. Our strategic transition unavoidably led to continued declines in our average loan balance and total income.

Speaker 4

Meanwhile, the expected credit loss provision, which must be accounted for upfront on the 1st day, amplify the accounting loss in the early stages of the product lifecycle under the new business model. In the Q1 of 2024, our total income was RMB7 1,000,000,000 representing a decrease of 30 0.9%. During the quarter, our technology platform based income was RMB2.6 billion, representing a decrease of 49%. Our net interest income was RMB2.8 billion, a decrease of 15%. And our guarantee income was RMB0.92 billion, a decrease of 34.7%.

Speaker 4

All are basically in line with the decrease of outstanding loan balance in which guarantee income decreased by a lesser amount of 2 due to the offsetting effect of an increase in risk borne by the company. Turning to our we remain committed to cost optimizations. I want to highlight that our total expenses, if excluding credit losses, finance courses and other losses, decreased by 37% year over year to RMB3.6 billion this quarter as we continue to enhance operational efficiency. This 37 magnitude of decrease in expense is greater than that of the 30.9% decline in the total income. Let's highlight just a few of the key expense items.

Speaker 4

Our total sales and marketing expenses, which mainly include expenses for borrower acquisition courses as well as general sales and marketing expenses decreased by 50% to RMB1.5 billion in the 1st quarter. The decrease was mainly due to decrease in loan related expenses as a result of the decrease in new loan sales and decreased retention expenses as well as referral expenses from platform services attributable to the decreased transaction for them. Our credit impairment losses decreased by 8.6 percent to RMB2.9 billion in the 1st quarter, primarily due to the decrease in provision of loans and receivables as a result of the decrease of loan balance and the improved asset quality. Our finance costs decreased by 69.3 percent to RMB58 1,000,000 in the 1st quarter from RMB189 1,000,000 in the same period of 2023, mainly due to the decrease of interest expense as a result of the payment of C1, convertible promissory notes and other debts and partially offset by the decrease of interest income from bank deposits. The key item in this quarter is really the income tax.

Speaker 4

Whilst we achieved pre profit pre tax profit of RMB447 1,000,000 in the 1st quarter, our income tax expenses increased to RMB0.3 billion in the first quarter from RMB0.4 billion in the same period of 2 to 3. This is mainly due to the increase in withholding tax associated with 1 off dividends that were paid by our PLC subsidiaries in order to support the potential distribution of special dividend we announced on March 21, 2/24. As a result, net loss for the Q1 was RMB838 1,000,000 compared with a net profit of RMB732 1,000,000 in the same quarter of 2 to 3. Meanwhile, our basic and diluted loss per ADS during the Q1 were both or US0.21 dollars Turning now to our balance sheet. As of March 31, 2/24, we had a net excess of RMB92.8 billion and a cash balance of RMB39.4 billion in terms of capital as of the end of March 2022.

Speaker 4

The 2 main operating entities were well capitalized. Our guaranteed subsidiaries leverage ratio increased to 2.4 times as driven by the increase of our guaranteed balance associated with our increased risk exposure and also the decrease of net assets due to the dividend upstream to the parent companies. And our consumer finance company capital adequacy ratio 15.1% and well above the required 10.5% regulatory requirement. All these factors provide significant support for the company to navigate through the evolving macroeconomic landscapes and the business transition period while laying the groundwork for us to continuously rewarding our interests in future. That concludes our prepared remarks for today.

Speaker 4

Operator, we are now ready to take questions.

Operator

Thank

Speaker 5

I have 2 actually. So my first question is about your special dividend. Could you give us more update on the progress of your special dividend? So with the incurred tax, I guess, the money should have been offshore. And what's the progress of these special dividend distribution?

Speaker 5

And then in the longer term, do you have any mid term plans for your future shareholder returns after this special dividend? And my second question is for your asset quality. So I do notice that your flow rate and your 30 day delinquency rate, they achieved a notable decline in the Q1. So do you think this improvement of the asset quality is sustainable into the coming quarters and then which can also lead to lowered impairment losses in the coming quarters?

Speaker 2

Okay. Thank you. This is Lai speaking. So your first question about special dividends. We announced special dividend plan on March 21, and we also announced on March 25 that shareholders of record at the close of June 4, 2024, will be entitled to receive this special dividend.

Speaker 2

But it is still subject to our shareholder approval at the AGM Annual General Meeting, which will be held on May 30. And then our long term dividend policy, it remains unchanged, which is about 20% to 40% of the annual net profit. And then answering your second question about asset quality improvement. Yes, we see that C2M3 net flow improved in 4th quarter, down to 1.0 percent from 1.2% in the last quarter of 2023. We believe our de risking efforts taken in 20 23, those gradually come into effect, such as credit policy tightening, underwriting process and then sales control measures strengthening, segment mix optimization and channel optimization and so forth.

Speaker 2

And also, as Greg explained, the concentrated impact from geographic restructuring in the Q3 last year, that has been gradually fading away. And also, our new portfolio, we built from 2023 with better quality with a tightened underwriting policy. That portion, we take gradually larger part of total loan balance. So that will further help us to improve going forward. However, while we observe this improvement in the 3rd in C2M's net flow in the Q1, We still remain very cautious about the future sustainability of this trend.

Speaker 2

And we continue to take a prudent action and approach considering our higher risk exposure under this 100% guarantee model.

Operator

Your next question comes from Qiyo Huang. Please go ahead.

Speaker 6

Hi, good morning. Thanks, management. This is Xiao from Moltencality. I'm really happy to see some early improvement on the risk indicator and the pre tax profitability in the quarter. So I have two questions.

Speaker 6

One is on the asset quality, we could see there's some early improvement. What's the management view on the loan growth into the rest of the year? This one. And the second question is on the unit economics. How do you manage to expect it to evolve as we transition to 100% of our guarantee model?

Speaker 6

Could you management discussed this a little bit during the previous talks? And could you give more color more detailed color on the unit economics?

Speaker 3

Thanks. Greg here responding. So on the while we've seen the improvement as YS just outlined, which is clearly good news. In terms of demand by customers, particularly of the quality that we're targeting, that demand is still, to be honest, somewhat subdued, right? So when we look at the Q1, we haven't seen an uptick, a meaningful uptick in the demand among strong borrowers.

Speaker 3

So that is really going to drive our continued prudence because we really want to see stronger demand before we would expand beyond where we are today in terms of volumes. Obviously, given that we're now transitioning we have transitioned all new business to the 100% guarantee model and more and more of our total book will be that 100% guarantee model. We do want to observe for a few quarters everything is right as we are taking on more risk. So we stick to in terms of the guidance we've given for this year, new loan volume, we expect to be still $190,000,000,000 to $220,000,000,000 which at the end of the year would take us to an ending balance of about $200,000,000,000 to $230,000,000,000 So that's the outlook, remains unchanged, I guess, since the last quarter we gave guidance on this. In terms of UE, I think this is really the most important trend also to watch now that we've shifted fully to the 100% guarantee model.

Speaker 3

As we've said, if we look at our loan balance, given that more and more is coming from the 100% guarantee model, our take rate has increased now to 9% from 7.3%. And if you look at new business that's now being done under the 100% guarantee model, the gross take rate is approaching 14 percentage points, right? So basically, it's effectively a doubling from where we were a couple of quarters ago as we shift from the CGI model now to more and more under the guarantee model. So this is a trend that we will expect to continue. So as we move throughout the course of this year, such that more and more of the book is the 100 guarantee model, you should see the overall take rate converge up to about 14%.

Speaker 3

And then from there, it's a question of our cost management and it's a question of continued improvement, hopefully, on the credit quality, which will then drive the bottom line. And we haven't given guidance on that yet. But just to highlight that we note when we do new loans, for example, in 2024, new loans under the 100% guarantee model, we do expect them to be lifetime profitable. But we also do expect that in the 1st calendar year due to upfront standard provisions, they will have a negative P and L contribution, but again lifetime profitable. So that's our outlook on the unit economic side.

Speaker 4

Thank you very much.

Operator

Your next question comes from Yada Lee with CICC. Please go ahead.

Speaker 7

Hello, management. Thanks for taking my questions. This is Yada with CICC. And my first question is regarding the risk bearing percentage. Since last quarter, the company has completed the transition towards a 100% guarantee model.

Speaker 7

And looking forward, could you please give us more color on how to view the risk of growing percentage at the end of this year and the future? Secondly, I was wondering if you could share more about the outlook for the bottom line. In addition, if possible, can you elaborate more about once we have gone through the transition period, what is the expected margin or the profit take rate for the SME loans? That's all. Thank you.

Speaker 2

Thanks, Yada, for your question. Let me take your first question, and then I will pass the second to David. About 100% guarantee model transition, you know that started from Q4 the Q4 last year that all new loans that we booked were granted by either by customer finance company as on balance sheet loans or was granted by our guaranteed company under 100% risk bearing business model, right? And then knowing that, as of the end of Q4 this year, including safe business loans, the total loan balance for which we are bearing risk responsibility is 48.3% out of total loan balance and then which is up from 39.8% from the previous quarter. And is 26% of total free loan balance that was enabled under our new 100% guarantee model.

Speaker 2

And then going forward, surely, because this is our new model in place, so it will gradually I mean, the portion of our risk bearing balance will gradually and continuously go

Speaker 4

up. All right. So Yana, thanks for your question on this quarter net loss. I think as we mentioned before, we did achieve a pre tax for this quarter. The key item actually affecting this quarter is really on the income tax.

Speaker 4

Income tax expenses increased to RMB1.3 billion, as you know, in this quarter from RMB0.4 billion in the same period of 2 to 3. This is really mainly due to the RMB1.05 billion withholding tax, which associated with our cross border dividend upstream from a PRC operating entities to their immediate holding company offshore. So as I mentioned, this cross border dividend upstream arrangement is primarily to support the distribution of the specialty meal plan at HOKO level that we announced on March 21 and of course for other general liquidity arrangement purpose at offshore. That's what the comment I want to make.

Operator

Thank you. That concludes our question and answer session for today. I will now turn the call back over to our management for closing remarks.

Speaker 1

Thank you. This concludes today's call. Thank you for joining the conference call. If you have more questions, please do not hesitate to contact the company's IR team. Thanks again.

Operator

Thank you. This conference is now concluded. You may now disconnect.

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