Q3 2019 Earnings Call
Our in listen only mode. After managements prepared remarks, there will be a question and answer session.
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Today's call is being recorded.
I will now turn the call over to your host Mr., Jimmy 10, Investor Relations for the company Jimmy Please go ahead.
Hello, everyone and welcome to our third quarter 2019 earnings Conference call. The company results, we should be on use of why does it fit earlier, they end up with that online.
And although the earnings release I found for the company email list by visiting the IR section of our website at <unk> Dot PPI Dot com.
If John our chairman and co Chief Executive Officer, Mr. phone, John I will call Chief executive of be families. The Simon Who's our Chief Financial Officer, we start the call. We've got that every month and conclude with you and infection. During these calls you will be referring to seven non-GAAP financial measures to review and if that's I've offerings.
non-GAAP financial measure not intended to be completed in isolation, all as a substitute for the financial information prepared and presented in accordance with U.S. get.
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 US Private Securities Litigation Reform Act of 99 five.
Commit involve inherent risks and.
May be materially different from the news.
Okay.
Let me share regarding these and other recent answer than does not include it in the company's volumes with the us.
And exchange.
Manny obligation to update any forward looking statements except as required under.
Well be with you shortly.
Hi, presented on our IR website, providing hips offerings for the quarter.
Andrew solid results.
Hello disease the operator.
Its funding sources towards the institutions.
Specifically the proportion of loan originations facilitated by institution partners increased to 75% for the quarter.
More excited any our rapid transition in funding base has been achieved and the same time, which continuous growth in new volumes.
In the third quarter, we achieved year over year and part of recording on volume growth of 6% to 6% and 14% respectively to 20 24.6 billion art Amby.
Consequently for the first nine months of 2019 on an origination allergic origination volume reached 65 per Se 65.3 billion RMB, which has exceeded our new origination volumes in the full year 2018 of six 1.5, beating our.
Beat.
Our operating revenue increased by 35% year over year to 1.5 billion RMB and our operating income increased by 32% year over year too.
600, and a 49 million I'm.
Many of you may be aware that.
During our most recent annual general meeting our shareholders approve the changeover name to feed solution group and in Chinese too she could you.
Our ticker symbol will also be changed to two if I envy on that to denial of November .
Well the PPD AI, Brad we're continue to be the main interface for our borrowers.
The rebranding of the group were better reflect our diversified businesses such as in providing technology related services to our financial institution partners and our growing overseas business.
Similar machine is that and integration of finance and evolution.
Representing better alignment with the range of our businesses, our strategic development and our mission.
As a leader in the technology, driven consumer finance space, we will remain focused on our strategies and maximize shareholder value.
Expanding our core business enhancing our brand recognition and a continuing to invest in technology.
Now I'd like to pass the call over to our co CEO phone to discuss their update of our business.
Thank you, Chris and Hello, everyone as Cliff mentioned that we have undergone significant transition in less than a year our platform shifted from being mainly facilitated by individual investors to being predominantly for sort of hereby institutions to.
To illustrate more details in the year ago period, our institutional fund the partners only facilitated around 14% of total originations while looking at the third quarter of Tuncay 19, our institutional partners facilitates a more than 75% of dollar donations, notably since October all of our loan.
Originations are being for stay here by institutional partners today, the number of institutional partners active on our platform have increased to around 30.
During this transition period, we have continued to deliver consistent performance.
Overall loan volume grew sequentially each over the past the four quarters with an average growth rate of 14% for each quarter, our third quarter loan volume grew 66% year over year.
Our revenues and operating income are both higher by over 30% versus a year ago period and during this period, our delinquency rates have remained broadly stable despite the ups and downs in the industry and the impact of that microeconomics slowdown.
I will transition has been rapid and a smooth and arguably one of the most successful in the PDP industry. These successful operational transformation demonstrates our internal extensive experience strong execution and management capability.
This transition would not have been possible without our institutional partners their trust and supporting us reflect our value proposition to them and further validates our core capabilities, our experience as well as our broad technology capabilities.
Today, we also announced that we are discontinuing the PDP mode of the business and a going forward. It we will focus entirely on servicing and a solicitation and facilitating loans partnering with financial institutions. Since we have started new loan originations funded by individual PDP investors our PDP related.
Loan balance will continue to shrink.
As evidenced by the monthly PDP loan balance figures disclosed on that and I ate website. Our PDP loan balance has already decreased by more than half from 19 different IB at the end of June two nine benign be at the end of October .
The loan partners on our platform are relatively short our average eight to nine months. So this loan balance will run off fairly quickly without any new originations based on the current run rate our purity loan balance is expected to be completed runoff in the first half of next year. We believe this rob process.
We'll be smooth.
As a result of these measures we have taken our exposure to PDP lending is getting smaller today pizzuti contributes to zero of our new loan originations as of October PDP loans accounted for less than 30% of the total outstanding on our platform and this proportion will continue to fall in.
The story on the regulatory developments in PDP landing, therefore, largely have no influence AOS anymore.
Fundamentally the consumer finance market in China is vast and the remains under penetrated and we're confident that with our experience and a capabilities theme Aleutian group is well positioned to connect and facilitate individualist financing needs with banks and other financial institutions.
With that ill now turn the call over to our CFO timing whole, who will discuss our financial results for the quarter.
Thank you felt and Hello, everyone.
We are delighted with our performance achieving solid operational and financial results in the third quarter as loan origination volume progressively increased underscoring the strength of our markets and the growth trajectory of our business.
non-GAAP adjusted operating income increased year over year by a solid 45% and our non-GAAP operating margin was at a healthy level of 43% our operating margin. However declined quarter over quarter. This is inline with our expectation and was mainly due to the rapid shift in the funding.
Next on our platform towards institutions as we have discussed on our previous earnings calls loans facilitated by institutional investors have somewhat lower margin than loans facilitated by individual investors. Despite the significant transition we have been through on an absolute basis, our profitability remains very healthy within.
Operating margin of 43% and an annualized return on equity of 33% in the third quarter.
Our balance sheet also remained solid with approximately 2.2 billion RMB of cash and short term liquidity.
Notably our quality assurance fund remains sufficient with a total balance of 6 billion RMB equivalent to 21% of the total outstanding loan principal and interest with quality assurance.
Our results demonstrate the resilience of our business model and our ability to adapt to the changing regulatory and market dynamics.
Now let me briefly go over the financial results for the third quarter and the interest of time I will not walk through each item line by line on this call. Please refer to our earnings release for more details.
Operating revenues for the third quarter of 2019 increased by 35% to approximately 1.5 billion RMB from 1.1 billion RMB in the same period of 2018, primarily due to the increase in loan facilitation service fees post facilitation service fees and interest income from loans invest.
Is that mainly through trusts.
Loan facilitation service fees increased by 26% to 894 million RMB for the third quarter of 29 team from 708 million RMB in the same period of 2018, primarily due to the increase in loan origination volume.
Most of Dilatation service fees increased by 25% to 301 million RMB for the third quarter of 2019 from 240 million RMB in the same period of 2018.
Merrily due to the increase in loan origination volume and the rolling impact of differ transaction.
Net interest income and loan provision offices were an income of 265 million RMB compared to an income of 16.1 million RMB in the same period of 2018, mainly due to the increased interest income from the expansion and the outstanding loan balances of consolidated trusts.
non-GAAP adjusted operating income, which excludes share based compensation expenses before tax was 658 million RMB for the third quarter of 2019, representing an increase of 45%.
Around 454 million RMB in the same period of 2018.
Other income was.
80 million RMB for the third quarter of 2019, compared with 251 million RMB at the same period of 2018, primarily due to a lower gain from the quality assurance fun in the quarter.
Net profit decreased by 7.9% to 599 million R&D for the third quarter of 29 team from 650 arm million RMB in the same period of 2018.
Now turning to guidance.
In the last quarter, we guided that we expected loan originations facilitated by institutional partners in the second half of 2019 to be in the range of 32 to 38 billion RMB.
Having achieved 18.5 billion RMB and loan originations facilitated by institutional partners in the third quarter, we now expect to be hitting the upper half of this guidance range.
And for the fourth quarter, we therefore expect total loan origination volumes to be in the range of $16 billion to $19 billion RMP.
This represents a sequential decline in loan volume growth in the fourth quarter, but we expect this to be temporary.
Mainly due to the drag from our deliberate decision to sharply rundown loan originations facilitated by individual PDP investors, which was still a quarter of our loan originations in the third quarter.
In addition, a smaller secondary factor seasonality.
That the fourth quarter traditionally is a tight liquidity period for our institutional partners such as commercial banks that have to meet certain liquidity ratios at the end of the year.
We are fully confident that this is only a temporary slowdown and that volumes will recover in the new year.
Our institutional partner pipeline remains solid and we are presently in active discussions with over 10 potential new partners.
Looking forward our strategy remains committed to and focused on consumer finance the market in China is vast and underpenetrated.
On the other hand, the demand from financial institutions for our services is also huge and growing our.
Our core capabilities position us well to facilitate borrowers and financial institutions and enjoy the benefits of this fast opportunity. We are focused on deepening our cooperation of financial institutions leveraging on our extensive experience and proprietary proprietary technology. We are also committed to our inner.
National expansion with our initial focus on southeast Asia.
With that I will conclude my prepared remarks, and we will now open the call to questions. Operator. Please continue.
We will now begin.
The question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question.
Comes from.
Sanjay Sakhrani of KBW. Please.
Please go ahead.
Hi, This is actually Steven Kwok filling in for Sanjay. My first question is just around managements commentary around expansion overseas and also provide technology to financial institutions can you guys elaborate on that and over time, how how should we expect that to ramp up in the impacts on the TNL. Thanks.
Sure on the international front.
We started operating in Indonesia since the beginning of this year.
And we have recently applied to become a fully licensed PTP lender under Indonesian regulations, and we hope to have a favorable results before the end of the year.
So the businesses is young, but we definitely report back with further updates going forward.
Philippines is another market, we have started operating recently as well and we are also looking into other Asian markets.
Such as in India, and in Vietnam as well.
With regards to financial institutions. This is pretty much an extension of the work we're doing on the funding side.
We are partnering with many license financial institutions.
For the obviously to help for the some facilitations in the platform at the same time many of them are deficient or do not have the full suite of capabilities for consumer finance and we're also in there to help them to build their own capabilities in and whether its.
Risk management, serving some loans for detection.
And we are going into work with them to implement.
These capabilities in house. So this is a big part of our strategy going forward to work more deeply and closely with financial institutions.
Great does that answer your question.
Yes, it does and as a follow up just around the revenue yield Tom you talked about how the decline is attributable to moving more to the institutional side. It should we expect this to be the run rate going forward or are there any further impacts given that your funding. So it's still had a component of the retail side in the third quarter.
Yes so.
Obviously the.
Our loan volume grew sequentially by 14% revenues softened a little declining by around 3% quarter on quarter.
This is really a direct reflection of the lower margin lower take rates of the loans facilitated by institutions and also the rapid ramp up in institutional funds the third quarter from 45% to 75% of total volume in from Q2 to Q3 I.
I do think I think most of the take rate decline is behind us and Q3 I would think is a good reflection of our take rate revenue margins. Since our platform was already majority funded by institutions in the third quarter.
Great. Thanks for taking my questions.
Thanks, Thanks Steven.
Again, if you have a question. Please press Star then one on a touchtone phone.
The next question comes from your own Jong of Credit Suisse. Please go ahead.
Hi, Thank you management for taking my questions and congratulations on your latest.
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Question.
The latest stuff.
Hi.
Please provide.
And they just update.
Hi partners.
We're working with.
How many.
Hi, Thanks.
Three Q2 Q.
Any changes.
Thanks.
Sure.
And secondly.
At some acquisition cost.
Ill.
How's the trend of the castle. Thank you for.
Finally.
Thank you.
Changes.
Some financial guarantee that is.
Yeah.
I wonder whats driving that number.
Sure. Thanks, Sharon I.
I will first address the institutional break funding breaks down.
There has been a.
Continued shift towards working with banks and consumer finance companies.
I'm in let me presently we are roughly in terms of loan volume about 80% of our lending volume loan origination volume is being facilitated by banks and consumer finance companies.
The trusts are roughly about 15% and other financial institutions would be roughly about 5%. So.
We have continued to shift further towards working with banks in consumer finance companies I would think that we are now at more of a steady state in terms of proportions.
And and probably wouldn't expect to see significant shifts from here in the near term.
The the banks that we worked within this is a common question. They are primarily midsize banks in city commercial banks and that continues to be the case from previous quarters.
The number of their financial institutions that we partner with I believe in the previous quarter. We said it was.
Over 20, and I think I'd now with the guidance that was the comment we made in the last quarter and this quarter. We said it's around it's about 30 institutional partners that we work with actively and we have a good pipeline of another 10 that we actively in discussions with.
With regards to customer acquisition cost.
The customer acquisition cost per successful borrower.
Six per new borrowers successful new borrower was around 220 RMB in the third quarter.
In the previous quarter. This was about 190 RMB.
And the increase was expected and we guided for this in the previous quarter, because there's been an ongoing shift in the the mix of new borrowers towards the higher quality higher credit quality segment, which were targeting.
And the this segment has somewhat higher acquisition costs now looking into the fourth quarter and looking at the trends that we see at the moment I think this acquisition cost per new borrower.
Should be relatively broadly stable in the fourth quarter, we're not seeing huge pressures at the moment.
And finally your question on the fair value changes that are in our PNM an income statement.
You have to I think the way to look at it there are more numbers around this tender.
Third quarter.
So this is the realized there was a realized loss from financial guarantee derivatives of 37 million and there's a fair value loss of 43 million in the fair value change of financial gains derivatives, you really should be looking at these two line items together and netting it all.
Yes.
The financial guarantee derivatives. If you go back in time and memory. These relates to a second.
Investor Protection.
Reserve fund that we used to run it's called the Investor Reserve Fund and we discontinued this in.
At the end of 2017.
So what you're seeing these as the the gradual maturity of the these investment programs that this.
Our asked this Investor Reserve fund was protecting.
And during the quarter, there was more maturities happening and hence you see slightly larger numbers, but you really should be looking at a net basis and on a net basis you will see that the the number has been the net result hasn't changed much versus previous quarters I could walk through this with you in further detail separately if you're in.
Trusted.
Okay. Thank you.
Okay.
Again, if you have a question. Please press Star then one on a touchtone phone.
The next question comes from Alex You have yes. Please go ahead.
Hi, Andrew Thanks for taking my question.
Simple question companies on the long tenure, so you have continued to decline therapy to around.
More than a month. So just wondering instead of a deliberate strategy were atokin and how should we expect it to check so works and secondly on them.
So apologies.
Additional information that Oh.
<unk> cost increased Oh actually expected because we are moving towards the higher quarterly customers and going for how should we.
That's it.
The Chen on your customer acquisition. So if we are moving further towards the higher quality borrowers.
Or are we comfortable with the current segment.
And finally, just would like to have enough update on your share repurchase scheme and.
We'll be great have your thoughts about yeah capital return on plan regarding dividends and share repurchase Kim thanks.
[laughter].
Okay. Thanks, Alex.
Yes, the low tenor shorten slightly to the lower end of eight to nine months I mean, the low end of that range. It's me, it's not a deliberate strategic shift it's mainly because we certainly financial institutions that we partner with.
Their preference is of the shorter tenors, so it's really driven by the preference by some of the institutional partners that were working with.
With regards to your question and customer acquisition cost the trends in the segment were working with yes. We we do have plans obviously in the coming year to further expand.
Towards or the the towards the even better quality credit quality segment.
And the customer acquisition costs will obviously shift.
As well in that in that in that regard in the near term, though we don't see much pressure in what we're doing.
But there may be some shift as we go into 2020 and.
But bearing in mind as you work with a different segment you're dealing with.
No different profiles.
Different ticket sizes potentially different credit better credit risks. So I think you really have to look at the whole package in totality at the end of the day.
And finally your question on share buybacks and capital management.
You know, we still have an outstanding buyback quota of 51 million us dollars and we will continue to approach our buybacks opportunistically and we'll take into account of course, our operational needs.
Given that.
You know.
There is a certain degree of capital intensity.
Dealing with this.
Additionally, facilitate a model that we're running at this at this moment.
In terms of dividends our stance on this is the same as in previous quarters that it is into our intention to pay dividends each year, but of course. This is subject to review at the end of the day.
By the board and we will also take into account of the.
The capital needs that we have in our business model. So so that remains unchanged.
Yes, thanks very helpful. Thank you.
Again, if you have a question. Please press Star then one on a touchtone phone.
The next question comes from John Chi of Morgan Stanley . Please go ahead.
Hi, Thanks management for taking my questions.
On top of incidentally.
Previous easily I'm sure, it's just repetitive questions but.
I would like to have.
Brick monthly revenue by something so what portion of the revenues contributed by keeping the funding.
Transform them, both in something institutional from them.
And.
Possible can management provide.
Bonds, and so I'm kind of Q.
The.
Hey, good number or whats the outlook about the outstanding balance.
Hum and also on.
The risk because so much the that we are real performance is stable so.
Okay.
That's a trend that something is outside conversion rates and power.
Transmission essentially go in boundaries kind of 2000 lower risk going forward. So.
If then condos behind.
Our stable, which performances is that an net net new phones or how should we.
Understand that.
A related question is.
Our current customer base, if you need to compare them.
We like maybe two quarters ago, when our fundamentals the PDP can you see a significant change of our all age.
Maybe the outstanding loan put borrower does that change significantly when you translate to.
More institutional funding.
Thank you very much.
Yeah, John Thanks for your questions.
Regarding your first question revenue breakdown.
You could clearly you can see it clearly from our income statement the contribution from trusts that as the net interest income and provisions loan loss provisions item on the revenue side.
But for the long facilitation post facilitation fees.
I would really encourage you to I think I would encourage the the market investors to look at it in totality because in the last quarter, we were pretty much predominantly driven by.
Institutional funding partners.
And as we said previously that the the sort of that the take rate dynamics that we saw in the third quarter is in our view a you know probably a pretty good reflection of what it will look like going forward. So I think we're pretty comfortable with where where what we see in that front.
The loan outstanding balance as of the end of the third quarter was 35 billion are in the.
And the outlook of this is it's.
Clearly I think fourth quarter, we may see some softening as we've guided to loan origination volume total loan origination volume in the fourth quarter will be a little bit soft for temporary reasons and at the same time, because we are also running off the PDP loan balance obviously still quite.
Quite quite rapidly so that will be a near term drag as well, but we're confident I mean past the stages transition period, that's coming to an end.
We can deliver healthy growth going forward.
Your question. Your next question is around credit risk delinquencies and you've noted that delinquencies were generally stable in the third quarter and continue to perform within our expected range in the short term in the fourth quarter, there could be some up small upward pressure mainly on the back of the tightening of loan collect.
And then data practices across the industry, but overall, we believe this is manageable.
And we expect our delinquency rates as you mentioned to be structurally improving due to our shift towards a better quality borrowers segment relative to the past. So I think structurally the direction is still in for improvement although in the fourth quarter I mean, there's obviously a bit of a bit of pressure from us.
Happening in the industry.
And finally with respect to the outstanding loan per borrower.
We I don't think we've seen significant shifts. They this segment. We maybe first time borrowers we are lending a slightly larger than before but I think in broad terms no significant difference from previously.
Does that answer your question John .
Yes so.
The overall borrower base.
So now we have predominantly from the by institutions August the borrower.
Let's see overlap with our.
On historical borrower base, which is mostly from the bumpy to be if we do you have significant.
Change off the borrower base all competition.
There's some there's some overlap there are some overlap, but we're also adding on new new borrowers.
So it's a it's a combination of both I don't have specific numbers in front of me, but it's both as you can see we are acquiring new customers in the market.
So and these are obviously the the second the target segment that where we're working on.
Thank you.
Thanks, John .
Again, if you have a question. Please press Star then one on a touchtone phone.
The next question comes from Jackie Swallow of China Renaissance. Please go ahead.
Hi, Simon Thanks for taking my question.
Actually just a follow up on John's questions regarding to the borrowers.
We actually moving too.
Better quality borrowers I just want to get some evidence because previously we actually provide a breakdown of our borrowers in terms of different risk level.
Oh, yes, selling Starwood list mentioned it system I just want to.
Good how are you know a roughly a break down off of the change off the you know lower raised.
Borrowers in the in the recent callers.
And Oh, I think a related question. They oh in terms of borrower acquisition channels Oh, what has been the.
You know change of in the causes one when we move into better.
Quality borrowers that would be very helpful. Thank you.
Sure Jackie I think you're right.
We.
There's been a there's been a significant up shift in the the credit ratings of our borrowers.
Previously or as we as you all know we have seven levels of or seven credit ratings for approved borrowers.
Levels, one two level seven where one is the highest quality and the seven is the lowest over the for the highest or the lower quality hits, the higher delinquency rates and that's a better characterization low one is low delinquency rate seven it's the highest.
Previously I think if you look back 18 months or 18 24 months ago, we were primarily lending operating in sort of the levels, maybe four and five.
Four or five six ish sort of as sort of the the bell curve the concentration.
We currently I think we are mainly servicing.
Segments 234 is the vast majority of our loan originations today. So there has been a a.
A sizable significant shift in that mix.
And sorry, Jackie I missed your final part last part of question would you mind.
Repeating it yet is about the yes, I mean, it's about the borrower acquisition channels. So so what trends changes because we want to acquire on credit quality customers. Thanks, Yes.
So the channels have obviously has shifted a little have sort of shifted some want and to reach sort of our SEC. Our target segment of borrowers we have shifted towards using more putting on more advertising and social media channels, such as using be chat more.
Our app stores have also been a.
Very key in.
Significant channel for us as well, so we have shifted towards using more social media types of channels.
As a result.
Got it very clear thank you.
Once again, if you have a question. Please press Star then one on a touchtone phone.
As there are no further questions now.
I'd like to turn the call back over to Jimmy Chen for closing remarks.
Thank you once for joining US today you have further questions. Please feel free to contact paperback Investor Relations crew. The contact information provided on our website. All you know were press release.
This concludes the <unk> the conference call you May now disconnect. Your line. Thank you.
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