Q2 2020 360 Finance Inc Earnings Call
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Thank you are saying Hello, everyone and welcome to our second quarter I took a 20 earnings conference call I always ask why easier I got the guy on the IR website, joining me today I'm, Scott Hi show, our senior director He's got out next year I like that though I mean, he's got done yet I like the out before we begin to prepared remarks I'd like to in my.
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Hello, everyone I'm very proud to report a strong financial and operating results for the second quarter, a well the micro environment to remain challenging a we still set a number of a record in key operational metrics total loan origination reached 58.9 billion during the quarter up 21.8% year on year.
Outstanding loan balances increased to 78.5 billion from 74.1 billion a quarter ago for the second quarter total revenue reached 3.34 bidding and non-GAAP net income reached 942 minute.
This is the most outstanding quarter, they resolve since our IPO.
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Our solid performance I know that's due on certain Michael backdrop for further demonstrate the effectiveness of our potent operational strategy. That's why I said resilience of our customer base and our risk management system.
We believe we have built a structural advantage over our peers, which enables us to successfully navigate through previous market uncertainties such has the P to P cracked a regulatory changes and depend dynamic in each of those cases, we further strengthened our leadership position with a macro environment.
In economy recovers, we see continued improvement in our operational metrics and we feel confident in our future prospects.
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Our take rates for the quarter improved the noticed played a driven by on continued efforts to boost operational efficiency and to refine our risk management system funding structure and the customer acquisition channels average pricing during the quarter was 27.2% all IR basis, which is a quick.
Evidence of 15% to 16% I'm, a PR basis. They won delinquency decreased to 6.2% at the end up a Q2. This was even better than the pre pandemic level off 6.5%. Moreover, our funding costs further decree decreased to 7.2% from seven twice.
7% in the prior quarter well below the peer average.
In the first how about 2020, we issued total 1.1 billion, a b assets and ranked number four behind and financial J.D. and Xiaomi in terms of a total insurance size, we acquired a 1.6 million new customers was approved a credit lines in the second quarter, which is.
200000 more than in Q1, and the average acquisition cost for those new customers was about 167 modestly higher than in Q1.
That's a market gradually consolidate toward the leading platforms, we have increasingly become the preferred fintech partner for many consumer focus the internet companies. So far we have connected to our service with 11 partners, including Xiaomi May Twond, Archie and many others putting J.D.D.
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Our new products initiatives also track the very well in Q2 daily transaction volume of our virtual credit card products. The pocket reached RMB 50 million at the end of a second quarter connecting 2.5 million accumulated users with about 2 million merchants and processing.
450, K. daily transactions.
Intelligent credit engine, which connects a institutions with our vast in active user base added another RMB 20 million day, they transaction volume to our platform.
We expect the momentum to continue and gradually enhanced the stickiness and activity level of our user base.
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We made further progress the things strategically upgrading to a technology powered digital platform during the quarter capitalized model and other tech power solutions accounted for over 26.9% of a total loan origination and we remain committed to increase the cap live contribution.
And to a 35% to 40% exiting this year.
In addition to a couple line model, we also working Austin, the rice, our risk management capability into star small juice and offer them to financial institutions as I'm now six institutions have already use of this service and when they more is in the pipeline in the long run we will continue to invest more in.
Our fintech capabilities and further strengthen our competitive advantage by our calculation tech enabled the revenues and powerful service revenues I already nearly 50% of our total revenue recently, we have proposed to our board of directors and the shareholders to change our name to three six stages attack.
Which will better reflect our current business dynamics and long term strategies.
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Last week, the screen People's caught up CRC announced a new guideline to reduce court protected interest rate path for private lending we have anticipated in the prepared for this prior to the release shortly after the official announcement of the guideline, we how to conference call to communicate our point of view with the capital market.
Well. It is greatly eyes is generally believed that the new guidelines are only applicable to private lending we are prepared for possibility that the financial regulators may refer to this guidelines well. In addition, it is widely believed that the 15.4% interest rate cap referred to.
Turning the guideline is the nominal hbr basis.
Which is equivalent to a roughly 27.3% on the IR basis. This is more or less inline with our current average pricing as a result, we expect that impact to our operations to be manageable reason, they we tested some experimental pricing structure with certain group of users essentially offering long.
To them at the lower rate than they otherwise would get the results indicates that carefully manage the pricing desktop could potentially lead to a higher customer out TV to the company as users may become more active and stuff.
In the intermediate term, we believe that regulators will likely encouraged gradually downward trend in the interest rate and is consistent with our long term strategy of serving much broader user base.
They're relatively lower price.
Yeah early may our affiliated companies restricted group has committed significant resource in becoming the controlling shareholder up a national Bank TB.
This will provide strong and vital support for us to further reduce funding cost diversified product offering and strategically TG clay upgrade to a technology powered digital platform.
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Finally, let me introduce our newly appointed CFO Mr. attic shoe. He was the CF up she was 361 export listing U.S.
Many of you may have already know him our former CFO, John who has been appointed as our CFO I would like to send John well has great efforts in building up a prudent internal financial system and the preventing our company in the comp capital markets well.
Now I'll pass the floor to Alex to dive into the details of financial performance.
Thank you Hashim that evening and good morning, everyone welcome to our quarterly earnings call for the interest of time I will not go over all the financial line items on the call. Please refer to our earnings release for those details.
Q2, a marked a sharp rebound for all of our business momentum from Q1 as a concerns over call. It 19 gradually faded the country to entered recovery mode and economic activities gradually picked up during the quarter benefiting from such micro trends, we have experienced robust the rebound in.
Our operations, particularly in the second half of the quarter.
Total debt net revenue for Q2 reached 3.34 bidding versus reported 18 bidding in Q1, and 2.23 billion a year ago the year over year comparison, the somewhat distorted by the accounting standard change early this year.
Total operating expenses, excluding the provisions increased 12% Q on Q, but decreased to 27% year on year, the sequential increase waiting parks driven by our deployment of resources to support business grows in the quarter in particular, we further strengthened our collection operations.
And on the ground customer acquisition team a year over year decline reflects significant improvement in customer acquisition cost.
Non-GAAP net income was 942 minute versus 255 million in Q1, and 692 million a year ago. Once again the year over year comparison was impacted by the accounting standard change on an apples to apples comparison basis under the old accounting standard now.
Non-GAAP net income would have been approximately 1.3 billion, representing an approximately 87% year over year increase.
With a growing contribution from capital light model and the Sten and the sizable increase in shareholders equity leverage ratio declined meaningfully to 8.3 times in Q2 compared to nine qualifying times.
Again average ratio will also impact by accounting standard change under the old standard leverage ratio in Q2 would have been 6.3 times versus nine coordinate times a year ago.
We will leverage ratio may vary from quarter to quarter, we expect to see overall downward trend going forward as capital light model continued to grow and we continue to create shareholders equity.
Meanwhile, our provision coverage ratio remained at a healthy 3.2 times in Q2 compared to 4.0 times in Q1.
The sequential decrease in provision coverage ratio was mainly because loans originated in previous quarters performed better than expected and and the PV and the provision for those loans were lowered by approximated 300, many in Q2.
What risk bearing.
Loans originated in Q2, we took similar conservative approach to tier one to estimate the potential losses, and the provisions which contingent liability.
Free cash reached a record high a 1.8 billion in Q2. This war was largely driven by strong operating results and effective management of working capital total cash and cash equivalent or 7.4 billion at the end above Q2 majority of our cash was allocated to security.
Posit with our financial institutional partners, and though so that registry capital up different entities to support our daily operation. We also leave a sizable buffer for any market uncertainties in the cash reserve. We believe that's such a sufficient cash position will not only enable us to compete.
Pete in average Indian market, but also position us to capture potential growth opportunities in the market recovery.
Finally, let me give you some color about our outlook was third quarter and the full year.
The strong positive momentum we experienced in the second half of Q2 has continued into current quarter, both in demand and asset quality, However, with a global pandemic steel Laurie and the impact on the recent regulatory change still somewhat unclear. We will continue to take a prudent and the conservative.
Approach in our business Penny therefore, we would like to maintain our full year loan origination guidance of RMB 200, 202 220 bidding.
With that I would like to conclude our prepared remarks, operator, we can now take some questions.
Thank you very much we'll now move onto their fuel question, but will quit taking longer Inc. Please ask your question managing although by English translation.
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Terms of the trend of interest rate or the pricing.
Actually quite a while ago, we are determined that the overall interest rate.
Trend will gradually trending down both from our.
Understanding with the regulatory environment and also from actually internal.
Assessment.
We believe that with a gradually lowered interest rate or pricing, we can reach a broader base a much broader a user base.
And.
Basically increase overall size of a business in the Laura.
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No clinically that will not begin to move I mean with other team with attendee, if you will need to be harder tend not to do.
And also we look at the you know the our current structure in terms of take rate I think we have pretty neat.
Reasonably good take rate of our current operation, which means that there was a pen have room to.
To maneuver in the new interest environment, and though so our overall operational efficiency, probably among the best in the among our peers and that's again give us that room shoe kind of but.
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Getting gross in the new interest environment and then.
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In our as our partner we have a further advantage in terms and low cost funding.
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Thats also will help us dealing with stayed relatively lower pricing environment.
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On there obviously is under the too early to do the detailed calculation, but roughly speaking it's just the Bakken envelopes kind of a calculation.
The right now we look at its about 16% on the IR basis.
That's somewhere around that number is solid breakeven point out based on current model.
That point by the way, we havent really consider any sort of incremental volume.
That associated with the lower rate environment.
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Okay in terms of the inside intelligent quite an engine really the purpose what that is to.
Activated our.
You could call. It CP users as you know we have over nearly 30 million users was poor credit line.
But the on any given quarter organic given time, the the one actually use a credit line, it's only less than 10 million. So there is.
Close to 20 million users we concluded in active user for those users we link them with the financial institutions. The product itself will will based on the the banks brand as opposed to the 360.
Brand.
And also we use a differentiating pricing.
To attract those users so for many users.
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Okay and that the difference between this.
Intelligence credit engine and the kept lied motto is that I know the.
Antigen credit engine, the like I said earlier the brand is under the banks not our brand and so in this model. We don't do are too long.
Management, the bank will do that optimal management, there, whereas the top line of although we do the after lending management.
Work so.
We do have helped the back to do the custom acquisition and also some pre screens of in terms of risk management prior prior to the lending activity.
So the pricing or the take rate bichon.
Intelligent credit engine and the cap light.
The intent and credit end inside at slightly lower than the than the cap line model, but not much too much difference there.
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The way second quarter, we still consider could tissue.
So we really don't set a target for the take rate.
In our daily operation are really what we look at this dynamic is that.
In the needs in this still quite a new interest environment, we want to serve a broader user base.
As the environment drive the overall take take rate probably for the entire industry gradually lower than we just follow that and.
In that trend.
So we don't.
We don't see all we don't expect to take wait to see dramatic decline in any short period of time, it's more like a gradual was overall industry environment.
Kind of scenario there.
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And what is our estimates for the vintage most Rachel.
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What is the based southern delinquency rate, if we can disclose that thank you.
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Okay contacted the overall improvement of asset quality continued into current quarter and.
Misting tongue basic you mentioned that the exiting the second quarter hour day, one delinquency was about 6.2%.
And now if you looked at the current number it's already flow few weeks assorted consistently below six.
In terms of day, one delinquency and then for the started a collection rates exiting the second quarter, we were at about 8%.
And now this number it's already between 89 and 90% so continue along a very.
Positive trend line there.
In terms of the vintage loss of will expect invented loss for the current portfolio.
Ranch and we work given was between two and half two three and half.
Right now this number or I would say the second quarter ending this number sitting about 3%.
Given the.
Yes, the delinquency.
Leading indicator trend we look at it.
It's possible down the road at the actual vintage loss, probably would be lower than that that number.
In terms of the act PD seven.
The delinquency there.
Pre pandemic, we were running at about 9.9% to 1% at the peak of the pandemic.
We were hit like a 1.84%.
Now this number already coming back to a significant lower right now we're running about 2.8%.
For that to for that metric.
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And we'll follow up on this.
I observe that given the improved asset quality, we should have the provision right back in the second quarter. So what is the number and that we expect further write back in the third quarter. Thank you.
Sure check it I will take this part of question. If you look at the financial statement for the first quarter, we booked a 1.7 billion provincial permission for contingent liability of that 1.7 billion 1.4 is poor the loans issued in the Q.
One and then 300 million was for the long issued prior two kilowatt and then in the second quarter. The total provision for a contingent liability was about 1 billion.
Within that 1 billion than the permission for the long issued in Q2 was actually 1.3 31.32 billion.
But at the same time, because the loans, we should improve his quarter actually performed better than we initially thought so there will be a ride back about 300 million in Q2 for those provision numbers. That's gave you the net provision for contingent liability for Q2.
At about one bidding.
Thank you so we expect for the right back in the in the circular.
Sorry the.
If you look at the way we took the provisions there.
For the first and second quarter for the new loans, we took.
Pretty much similar number of amount of a provision one is 1.4 billion. This had the second part it's one point suite. So both only I would say very conservative approach to estimate the provision there.
If the trend were looking today continued meaning the asset quality continues to improve.
You should probably continue to expect to see this right back on the provisions in the coming quarters.
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After.
The change of the name from Threesixty Finance team decreased 16 digit Pat I, just want to understand whether that will be.
Change in the business strategy specialty are we going to change from Fintech company to type thing.
In the specialty.
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Okay, Steve Thanks for the question. So yes, we proposed change on them from US recipient finance to 60 digitech, because if you look at the history of the company the founding team.
The common as you know, it's coming from 360 group, which by itself, it's more a tech based team.
And.
Our.
Resources at least in initial funding the resource and the capabilities are all coming from the technology side.
We just apply those resource and technologies to the to the financial service industry there.
There are in the short term.
We still have a lot of things we can do for the financial service segments of the market and for example, the customers square serving today are more or less focused on the mid to higher and in terms of interest range.
Down the road, we're looking for a much broader use of base to cover the lower end.
Or mid to lower and the interest rate in particular with the help of the KC be that will enable us to reach that goal. So eventually you will find ourselves viewed a whether you're quite a tech phenotyping tech platform, it's very unique one compared to most of others.
Because we become probably one of the only.
So a broader I will say full range of interest ranch.
But customer base dollar road.
And with them into true true bigger you go door contenders or nigger from Cushing inventories.
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Yes, again robust funding can time, given how we'll mukundan.
You would keeping liquidity should get I know you can and should that be that you either.
In order to be the for say the high Tech and then do.
But as you might get that doing dental mechanism.
The woman.
Q3, total yeah less than maybe you could talk with you.
Sure and then also stemming from the institutional side as you know right now we're already has a relationship with over 100 financial institutions.
Many of those institutions have the different sort of service scenarios at what kind of look what we can worldcom.
And to develop in the future to develop a look more like a standardized products on to achieve our sort of a tech enabling.
Capability there.
And.
In the long run of we can help those institutions from both technology and risk management and customer acquisition front.
To serve them to become really a major tech platform for those players from that perspective, we probably to your question looks a little bit similar to well connect on there but at the same time. We also have this.
Loan positive facilitation business there and.
And also the lending business that to some degree has.
Looks like a combination.
Of and financials chip a plus one connect.
And.
Further beyond that as you know we cat one about fitted cat.
Insurance.
Kind of a broker license.
That's cambia in the future become part of our.
Kind of listing companies portfolio. So we can expand that business into.
Beyond the current lending prospects service, adding additional elements in there.
So.
Okay.
Thank you very much.
In the timing of our RESCULA.
And last question.
In Wong.
The pipeline.
Thanks.
So we acquired remember director of strategy, what would your once you're going to which we don't give you announced young young our form and function, but article which Volga pocketbook.
Each of them beyond that as you bring each and John.
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Until she did a good outage.
Okay in terms of the cuts from acquisition from.
Given the current market.
Uncertainty still lingering.
Uncertainty in the market.
Our customer acquisition strategy, we're more focused on the existing or hold users you can call that.
As opposed to the new users.
That basically.
Give us the printing good handle in terms of a control of the customer acquisition cost.
In addition to focus on the over the existing users we also take.
Some approach in technology as well as in.
The way or the format, we acquired users to control the customer acquisition costs for example.
We have the partnership with that when we mentioned like the shall may twond.
Those kind of internet platform that.
We connect to our service.
And we get a certain type of a revenue sharing.
Model during the wisdom to do the customer acquisition that also help us to enhance our overall user acquisition cost.
There and there are still given our current focusing on the on existing users, meaning there's still quite a bit room wise to acquire new users down the road when we feel the overall market condition is right.
And we will basically adjust our strategy on.
With the time.
No we're going to new John you mentioned on the good to good time you quickly.
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So you can actually kind of meaning that you ship Cummins engine.
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So clean to electrical seem to.
On an academy into that.
Heavy duty here comes with the new now.
So I want to spend some time emphasize on this new customer acquisition strategy in terms of partnership with the so called Internet debt.
Platforms out there.
In the past and they have many.
Partners, they can choose from meaning the other fintech platforms.
Is it time goes the realize post from the asset quality as wise the.
Customer service perspective in particular.
The the customer complaints racial and all this metrics. We're way ahead of our peers. So we essentially become the default all the best partner for those so called Internet platforms there.
That's why.
Since.
Recently, we start to accelerate the connecting our service with these Internet partners. There as we mentioned that prepared remarks, we had to connect 11 in total already and then there's still quite a bit numbers out there on the in the pipeline.
Right now the total customer acquisition.
From these kind of a partnership already accounts for about 20% of our total new customer acquisition.
If there will act people drink element.
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And we good there who will cover which I didn't mean to conversions in the Duncan.
And also a secondly, I want to also refer to our relationship or our potential partnership with the how was the bank was kcbs.
Because the.
Relatively speaking the banks have better.
Branding.
Or brand recognition or brand quality.
As well as a low cost capital there. So we can design.
Partner was for PCB, we can design a lot of a difference.
Kind of but low priced products offer to our customers and also with the bank joins our efforts we can connect this.
Kind of platform was more scenario based.
Situations, there and eventually cover a much broader user base in terms of the different interest.
Range or different pricing range, that's again back to our goal eventually we launched so a much broader I will say.
Full wrenched.
Interest branch customer base from low to high down the road.
Tim.
Hi, Susan Warner.
Thank you very much ladies and gentlemen, this concludes todays conference call. Thank you for your participation you may now disconnect. Thank you very much.
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