Q4 2022 360 DigiTech Inc Earnings Call
Speaker 2: I.
Speaker 3: Ladies and gentlemen, thank you for standing by and welcome to the 360 Digitech 4th Quarter and full year 2022 Earnings Conference call. At this time, all participants are in a listen-only mode. After speaker's presentation, there will be a question and answer session, at which time if you wish to ask a question, you need to press star 1 1 on your telephone.
Speaker 3: Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Karen Gee, Senior Director of Capital Market. Please go ahead, Karen.
Speaker 1: Thank you, operator. Hello, everyone, and welcome to 360 Digitech's fourth quarter and the full year 2022 earnings conference call.
Speaker 4: Our earnings release was distributed earlier today and is available on our IR website.
Speaker 4: Joining me today are Mr. Wu Haisheng, our CEO , Mr. Alex Xu, our CFO , and Mr. Zhen Yan, our CIO. Before we start, I would like to refer you to our Safe Harbor statements in the earnings press release, which applies to this call as we will make certain forward-looking statements.
Speaker 4: Also, this call includes discussions of certain non-GAAP financial measures.
Speaker 4: Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to GAAP measures. Also, please note that, unless otherwise stated, all figures mentioned in this call are in RMB terms. Thank you for your attention.
Speaker 4: Now I will turn the call over to our CEO , Mr. Wu Hai Shen. Please go ahead.
Speaker 5: Okay.
Speaker 6: Thank you for your attention.
Speaker 4: Hello everyone, thanks for joining our Q4 2022 earnings conference call.
Speaker 6: Thank you for your attention.
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Speaker 6: hello to all our customers who directed our session today. We thank you for joining us thank you for frictionunders Quinn o channel nine. Also, thank p Finland's into this room is Chris 6 news. This is ITX..." Welcome to the p China fireside conversation spirit e w 01 what r e we s have never w d a sit o k r z i k s t, s f e
Speaker 4: On the macro environment front, we experienced a volatile culture in Q4. Swimming from widespread bounce across China in October and November to the border reopening and the cancellation of almost all COVID-19 restrictions in December .
Speaker 4: This concluded nearly a three-year period of strict COVID control policies in China.
Speaker 4: Regulatory authorities also announced that the rectification of financial business within the major Internet platform companies has been mostly completed.
Speaker 4: At a meeting held on February 27, 2023, the China Banking and Insurance Regulatory Commission, CBIRC, called for proactive coordination between financial, physical, and social policies to provide greater support for the growth of private consumption and the domestic demand in China.
Speaker 4: The Financial Market Department of the People's Bank of China, TBOOC, also pledged to facilitate the healthy development of the platform economy in three ways.
Speaker 4: including speeding up the rectification of the remaining minor issues with some internet platform companies.
Speaker 4: Improving standards for regular supervision and developing financial measures to support a sustainable, healthy development of the form economy.
Speaker 4: Our industry is therefore headed in a more positive direction.
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Speaker 4: As of the end of Q4, we have partnered with a total of 143 financial institutions for our loan facilitation business.
Speaker 4: Total loan origination and facilitation volume with RMB 104.6 billion up 8% year-over-year.
As of the end of Q4, cumulative number of users with approved credit lines reached approximately 44.5 million, and the cumulative borrowers with successful drawdowns reached approximately 27 million.
up by 16% and 11% year-over-year, respectively.
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In last Q4, China implemented its most extensive COVID control measures since 2020. While in December , the government adjusted its COVID policies and a massive wave of infections subsequently occurred across China.
Given the uncertainty posed by both the COVID and the initial period of reopening, we tighten our customer acquisition and the credit assessment holiday.
These, together with the optimization of our user base, have helped improve our day one delinquency rate from 4.5% in Q3 to 4.3% in Q4, the lowest level since 2018.
Despite the volatility in our business days, that relates due to the COVID restrictions.
Our overall risk performance remained stable.
With our user base upgraded, our pricing also stabilized.
The average IRR of the loans we originated and facilitated during this quarter was flat sequentially.
The average IRR of the loans we originated and facilitated during this quarter was flat sequentially. The average IRR of the loans we originated and coordinated
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We scaled back our marketing efforts given our concerns about the credit risk associated with the COVID. Meanwhile, we continued to upgrade our ITA model and improved our capabilities and efficiencies to acquire targeted users.
In Q4, the acquisition cost per new user with the credit line decreased by approximately 24% sequentially.
We further expanded and diversified our customer acquisition channels by working with different types of traffic platforms.
including short and long form videos.
social media, search engines and food delivery platforms, etc.
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In terms of cooperation with financial institutions, liquidity remains ample in the financial system during Q4, leading to strong demand for high quality assets by financial institutions and further reduction in our funding costs.
As of the end of Q4, we had established long-term partnerships with 143 financial institutions.
including over 10 joint stock banks and a major urban and rural commercial banks with...
including over 10 joint stock banks and a major urban and rural commercial banks with well state your JPEGS and audio disruption.
allowing us to diversify the funding sources. Our funding costs decreased by roughly 20 basis points sequentially.
For APS issuance, we issued RMB 1.8 billion in pure work and an average funding cost of 5.4%.
There were some unusual levels of volatility in the government market in the culture. While some industry peers cancelled their issuance on a large scale.
We continue to issue at a relatively stable price.
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We also made steady progress on the credit agency reform, namely, ZWAN-JI-LIAN in Q4. As of December 31, 2022, we had substantially completed the system integration with our financial institution partners under ZWAN-JI-LIAN in accordance with our plan submitted to the regulator.
to ensure our practice comply with the new rules.
Our loan facilitation process with these partners remained stable in terms of bonus credit approval rate and the Q-risk matrix.
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Given the macro challenges and the COVID control measures, China's consumer finance and SME credit markets faced headwinds on both the demand and risk fronts in 2022. Against this backdrop, we stick to our present operating strategy and leverage technology to drive quality growth.
In 2022, total loan origination and the facilitation volume was RMP $412.4 billion, up to 15.5% year over year, and in line with our guidance at the beginning of the year.
We made solid progress in optimizing our user base, allowing us to weather the macro headwinds and stabilize our effect quality.
Our day one delinquency rate decreased by more than 1% to 4.3% in Q4 from 5.4% in the same period last year, highlighting the resilience of our business.
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In light of the volatile macro environment, we've kept the percentage of loans originated and facilitated under our capitalized model, ICE and other tech solutions relatively stable at roughly 56% in 2022.
These business models have provided us with more flexibility and a means to balance risks.
We also maintain disciplined cost control and optimize our operational efficiency during the later year.
As such, we achieved our targeted net take rate for our baseline business despite the decline in loan pricing.
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We remain committed to fulfilling our social responsibilities as we operate our business. In 2022, we served a total of 910,000 self-employed individuals and 1.08 million business owners supporting about 6 million jobs.
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Given the gradual resumption of economic activity since the start of 2023, we have seen a modest recovery in credit needs and notable improvements in our asset quality.
Our day-one delinquency rate in February decreased further to 4.1%, while the 30-day collection rate quickly recovered to last Q3 level, showing a faster than expected improvement in our risk performance.
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First of all, the continued reduction in our credit costs and funding costs has created favorable conditions for us to better serve our users.
We have approximately 44.5 million cumulative users with approved credit lines. How to effectively convert them into borrowers and increase the credit utilization of our existing borrowers will be crucial to drive our overall growth. To enhance our engagement with inactive users, we will step...
and user experience that better serve their needs.
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We are very happy to have you here. We are very happy to have you here. We are very happy to have you here.
We will continue to diversify our customer acquisition channels. We have already established a clear competitive edge in the customer segment with following costs from 18% to 24%. Meanwhile, there are many traffic platforms that...
have large, diverse user bases but lack the expertise to engage with users in our target segments.
As we adjust our overall loan pricing to below 24%, our embedded finance business will be able to cover more leading traffic platforms. We expect more strategic partnership to be launched later this year.
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We will explore market opportunities to serve a broadly defined SME segment, including SME, SME owners, entrepreneurs, self-employed individuals, etc.
Public data shows consumer demand in certain sectors has recovered quickly since the Chinese New Year. The recovery in private consumption will improve the credit demand and repayment ability of the broadly defined SME segment.
To capitalize on these opportunities, we will develop targeted products to better serve their credit needs.
Approximately 30% of our current user base are broadly defined SMEs, whose outstanding loan balance only accounts for roughly a little bit higher than 30% of the total. This leaves substantial room for growth.
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In terms of the tax solution business, we have updated our cooperation with financial institutions through our end-to-end technology solutions. This will enable us to generate more risk-free revenue, serve a greater number of high quality users with lower pricing through our bank policy.
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Finally, I would like to conclude my prepared remarks with a few small thoughts. Our company is still very young, having only been around for over six years. The sector that we are in is also at the very early stage of its life cycle.
Our team is young and motivated and our initial entrepreneurial dream has just begun to materialize.
We desire to deliver far more brilliant results than what we have achieved today.
We believe that 2023 will be a good year for us thanks to the supportive government policies and the recovering macro economy, combined with our sound strategies and unique positioning.
Although the macroeconomic rebound has not been very robust so far in the first quarter, we have great confidence that 2023 will be a year of growth.
As we continue to improve our risk performance, expand our customer acquisition channels, optimize our funding costs, and improve our services to broadly define SMEs, we expect a fruitful year ahead.
Thank you, Alex. Thank you for your time.
Thank you, Hei-Shen. Good morning and good evening, everyone. Welcome to our fourth quarter earnings call. As Hei-Shen discussed earlier, we delivered another stock quarter in a very challenging microenvironment.
COVID outbreaks and the restrictions create additional headwinds for our operation during the quarter, particularly in December . However, since the reopening in early January , we have experienced some modest pickup in demand for consumer credit while as a quality noticeably improving.
In 2.4, we continue to target higher quality and lower risk user base and drive further improvement in user quality, despite significant micro uncertainties.
Key leading indicators, day one delinquency has been on a steady declining trend throughout 2022.
It was 4.3% in 2004 versus 4.5% in 2003 and further time in 2014, 4.1% in February . To this day, the declining trend continued on the graduate basis. The continued improvement in Day 1 delinquency reflects the year-based upgrade and micro-improvement.
in the new year. 30 day correction rate was 84.7% in 2014 versus 86.4% in Q3. This will increase the disruption of collection operations and the deterioration of consumer confidence. Following the timing COVID restriction in November .
and the surge in COVID cases in December . As the COVID cases peak in late December and the reopening progress, by early February , 30-day fraction rate has quickly recovered to above the Q3 level.
Total net revenue for Q4 was $3.9 billion versus $4.1 billion in Q3 and $4.4 billion a year.
Revenue from credit-driven service, capital heavy, was $2.8 billion in Q4 compared to $2.9 billion in Q3 and $2.7 billion a year ago. The slight year-on-year growth was mainly due to growth in the U.S. economy.
in unbalanced sheets, long volume, as we achieve the better utilization of our micro-landing license.
This solid performance was more than enough to offset decline.
in average pricing of the loan and a decrease in off balance sheet facilitation volume. Off balance sheet facilitation revenue take rate declined sequentially due to an adjustment.
On a year-on-year basis, the tech rate declined slightly despite significant price cuts.
Revenue from platform service capital light was $1.1 billion in Q4 compared to $1.2 billion in Q3 and $1.7 billion a year ago. The year-on-year decline was mainly due to decrease in volume and average prices of capital light long facilitation.
Q4 and full year 2022.
capsule-like loan precipitation, ICE, and other technology solutions combined account for roughly 56% of total loan volume.
As micro conditions gradually improve in 2023, we will try to strike an optimal balance between risk, growth, and probability. As such, contribution from PEP-Lite, ICE, and other technology solutions will be increased.
will likely be range bound in the near term.
In the long run, we'll continue to pursue tech-driven business model while seeking a balance among various forms of non-risk bearing solutions based on microenvironment and operational conditions. During the quarter, average IRR price of the loans for a capital-level FERo mid fused,
we originated and or facilitated remain stable Q-on-Q well within the regulatory rate cap requirements. Looking forward, we expect pricing to be rapidly stable for the coming quarters.
Sales and marketing expenses decreased by approximately 34 percent sequentially in Q4. During the quarter, we lowered the pace of new user acquisition as we focused more on existing users' engagement, given the extremely challenging micro-conditions. The
We added approximately 1.5 million new credit line users in Q4, compared to approximately 1.7 million in Q3.
unit cost to acquire a new credit line user declined approximately 24 percent sequentially.
The decline in consumer acquisition cost mainly reflects our continued efforts to drive efficiency in our operation as well as the soft demand in mutant economic activities.
As micro-condition gradually improves in 2023, we may also adjust the pace of the new user acquisition along the way. Meanwhile, re-energizing existing user base will continue to be a main driver for our growth.
As always, we will continue to use lifecycle ROI and LTV as key metrics to determine the pace and scope of our user acquisition strategy to ensure the sustainability and the profitability of our operations.
Overall, the risk profile of our loan portfolio remains stable in Q4 as increased contribution from new loans from high-quality borrowers offsetting negative impacts on old loans by micro uncertainty.
Although micro-conditioning appears gradually improving, it may still take some time to be reflected in the consumer's behavior. As such, we continue to take a prudent approach in booking provisions against potential credit loss.
Total new provisions for risk-bearing loans in Q4 were approximately $1.7 billion, and the write-backs of previous provisions in the quarter were marginal.
Provision Coverage Ratio, which is defined as total outstanding provisions divided by total outstanding delinquent loan balance between 90 and 180 days, or 456 percent in Q4 compared to 406 percent in Q3.
With solid operating loss and stable contribution from capitalized models, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, was at a historical low of 3.5 times in Q4 compared to 4.3 times a year ago.
We expect to see rather stable leverage ratio for the time being until capitalized contribution resumes growth in the future.
We generate approximately 1.8 billion cash from operations in Q4, compared to 1.6 in Q3. The sequential increase in operating cash flow was mainly driven by better working capital management.
Total cash and cash equivalent was $10.9 billion in Q4, essentially flat Q on Q. Non-restricted cash was approximately $7.2 billion Q4, also flat sequentially.
In the last few quarters, we have grown our cash in day-to-day business, mainly due to micro uncertainties.
As economic conditions improve, we may look for opportunities to deploy resources to launch new initiatives, develop new technologies, and develop new technologies to help
and expand service offerings. Non-gap net profit was $919 million.
and net income for 2022 was $4.21 billion. As we continue to generate healthy cash flow from operations, we believe our firm is sufficient to support our business development and to return to our shareholders. In accordance with the dividend policy approved by our board.
we declare another quarterly dividends of US$0.16 per ADS for Q4.
Finally, regarding our outlook for 2023, 2022 was an extremely challenging year in terms of micro-conditions. While we start to see tentative signs of economic recovery in the new year, the lingering economic impact from the past on consumer confidence and behavior may still last for a little bit.
At this junction, we see modest recovery in consumer credit demand, with growth rate potentially accelerating throughout this year. As such, we expect total loan volume for 2023 to be between RMB $455 billion and $495 billion, representing year-on-year growth of 10% to 20%.
As always, this forecast reflects the company's current and the preliminary view, which is subject to material change.
With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.
Thank you. As a reminder, if you would like to ask questions, please press star 11 on your telephone. To cancel your request, please press star 11 again.
For those who can speak Chinese, please ask your question in Chinese first, followed by English translation. In addition, in order to have enough time to address everyone on the call, please skip it to one question and one follow-up, and return to the queue if you have more questions. Thank you.
One moment for the first question.
First question comes from the line of Judy Chung from Citi. Please go ahead. Athroughdd Seven 2.
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So thank you, Manager, for giving me the first opportunity to ask a question, you know, at first place. And my question is regarding the credit demand. How significant is the credit demand recovery since the reopening?
And what's the main reason for not seeing a strong recovery? And also we said, we saw that management give a relatively conservative long-term long-term nation of growth guidance for this year, which is like a 10 to 20% young year growth, which has just been below the long-term growth guidance like last year, which is 15 to 25%.
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In terms of the credit recovery, actually, we have seen some search of consumer behavior recovery right after the reopening. And we also see a modest recovery in credit needs. To keep consumers heading.
If we look at different sectors, we have seen some sectors leading the recovery, for example, the restaurant and tourism, but some of the industries are lagging behind.
So we believe it takes some time for the outlook for employment and personal income to eventually benefit from the recovery of consumption and boosted the credit demand recovery. So it's not right now for the credit demand to recover from the.
Yes, to have an immediate recovery for our credit needs. And although the recovery in credit needs is not so robust in the recent two months in Q1, we believe the Q2 and Q3 will be better.
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and the company is also working on the guidance. In terms of our guidance, actually, we are a company sticking to our promise.
we won't allow the situation, we cannot deliver our promise. Even in the extreme situation in last year, we still stick to our initial, the guidance in the beginning of the year, and actually we delivered that. So in terms of the guidance for this year, we think it's...
within the market expectation and we tend to take a prudent view for the pace of our low-volume growth in this year. And we believe if the market situation, the macro economy improve further in later this year, we will also adjust our growth pace. And we believe this year will be – There were
for the long volume and the growth rate will be gradually ramping up in the year. And this year will be a good year for us.
I hope this answers your question, Judy.
Thank you for the questions. We will now move on to the next questions. Next question we have the line from Yada Lee from CICC. Please proceed.
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Then I'll do the translation. Hello management, this is Yada from the SEC and thanks for taking my question. During the COVID pandemic, we noticed that you pay more attention to the operation of existing users in terms of the customer acquisition side and therefore the new loan sales were parted from the premium existing users. And I was wondering if the marketing budget will increase in 2023 and...
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This is Guangxin. Thanks, Yadav, for your question. So I want to highlight the major growth driver for our business. Actually, we have over 40 million users with approved credit lines and over 20 million followers.
So you can see that we have over 20 million users who never borrowed the money from us. In terms of new customers, actually we have 3 to 4 million new customers acquired basically every year. So it's very crucial for us to spend more time making more efforts in...
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For a marketing budget perspective, actually, we allocate the budget to existing users and the new users. For existing users, we will spend money to reach out to them and use some offers to call back them. Use some better offers to call them back.
We will also improve the user experience of those broadly defined SME borrowers to keep them active on our platform. So we will keep our budget for the engagement of all the existing users.
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For the new users, we will expand our...
network to cooperate with more platforms in terms of the embedded finance business model. Our pricing is already below 24%, so it brings us opportunities to connect with more quality platforms to serve a larger number of customers.
So in terms of the market spending, considering the credit needs recovery in terms of the users' active needs, we will prioritize our work.
to increase the credit utilization for those new users first, and then we will consider to expand our marketing expanding to acquire new users.
I hope it satisfies your question.
Thank you for the questions. One moment for the next question. Next question we have live from Thomas Chong from Jefferies. Please go ahead.
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competition. Going into the future, in terms of the pricing side, how should we think about the competition with banks or a short form video? Thank you.
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First of all, we think we are quite differentiated from the traditional banks and the large internet platforms in terms of the pricing. Actually, we enjoy an absolute competitive edge in terms of serving the pricing segments between 18% to 24%.
So we don't believe that we will have a head-to-head competition with those large platform or traditional banks. On the contrary, we think we can provide additional value to them by cooperating with those platforms.
Right. So I'd like to take some time from you, but currently, you see, a limited ear because your hearing is occurred in very similar way. For example, listen, I don't know why you put your hearing in because if you listen to this live audio, whose tone gauge will alwaysshift. That's the final thought you would
So because of these differentiation points, we realized that a lot of internet giant platforms They want to.
So we believe this is what we can, the additional value can provide to those platforms.
Yeah, I hope this answers your question, Thomas.
Yeah, I hope this answers your question, Thomas.
Thank you for the questions. Next question comes from the line of Hans Van from CLSA. Please go ahead.
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and the market is also in the market. So this is Hanstun from CSA. I got a question related to the long outlook. Because the management was mentioning about this year is going to be better parts in the second half. So
So I was wondering that what the sort of lending pace across different quarters and also in terms of a split between
Capital Heavy and platform services, how do we think about this split this year? Do we have a target for this split in the long run? Thank you very much.
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In terms of the quarter-to-quarter loan solicitation pays, we expect it will run past throughout the year, which means the loan volume will grow quarter-by-quarter because we believe the credit needs will benefit from the recovery of the consumer's behavior. To look forward to the story, I'm HERBIE Youzag risks for ado in 2020 I hope you won't forget about this particular company, and that allowing you to put in the right thing not because you thought you were lifespan in your career but because you did something you didn't think you could and your real estate costs are Merch boxer
the long volume in the second half of this year will be increasing compared to the first half.
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If we look at it short term, we will actually adjust the long-modem contribution from the SLI business model based on our assessment of the macro environment and the credit risk associated with the macro.
In terms of, and we want to, we will adjust the contribution to balance the risk and the profitability of our business. We believe this year will be a stable year and we want to achieve a healthy profitability for our business. So this will be an overall judgment.
We expect the overall contribution from the Capital Light business will remain stable in this year. But in the next step, we will further develop our tech solution business because it's a pure tech business model.
So as our customer base grows, our loan volume will also increase. And we expect the contribution from the capital light or platform service will further increase in the future. And I just want to add a.
outlook for the first quarter in terms of year-over-year growth. And we look at it, although last year Q1 was a relatively normal quarter, meaning there is not really much disruption in operations in last year's Q1.
So the comp is not that easy. But even with that kind of not so easy comp, we are expecting year-over-year growth in terms of volume right off the page of this year. So we are going to start with five of five areas of area growth levels that are
And then along the way, as we move forward for the remainder of the year, we, as I mentioned, we may see a gradual acceleration of growth quarter by quarter on the year over year basis.
And then along the way, as we move forward for the remainder of the year, we, as I mentioned, we may see a gradual acceleration of growth quarter by quarter on the year over year basis. That's the point I want to add. Thank you.
Thank you for the questions. In the interest of time, we will now take the last question. One moment for the last question. Lastly, we have the live from Alex Ye from UPS. Please go ahead. Okay.
We will be making feedback on the." Members will not be tested on the phone Tuesday. But it will also be counted things like, That being said, So Thank You
So we need a rinse to keep the All- differentiated to treasures We want to thank you for presenting
I'll translate my question as a follow up on your loan guidance for this year. So if we look at the midpoint of your guidance of 15%,
Can I ask what are the underlying assumptions here? For example, do you still frame the consumer credit recovery as a modest one? And do you need to increase your risk appetite in order to achieve this midpoint target? And secondly, will the higher end be a target of 20%?
I'm just wondering what are the things or data points you need to see for you to be more comfortable to go forward to that higher end and what are the drivers. Thank you.
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Okay, from risk appetite perspective, we will take a prudent credit assessment approach in this year. So we can see the further improvements in our risk performance in 2023. For example, our day one delinquency rate in February has come down to 4.1%.
And the 30-day collection rate also recovered to a level, the highest level in last year. In February , and we believe in March those two indicators will further improve.
So in this year, overall risk performance will be better in last year. Our guidance is based on the assumption that the recovery of the macro environment will improve the outlook for the employment and the personal income and eventually benefit the credit needs recovery.
And at the same time, we believe there is a function that our risk performance will continue to improve down the road. So this year, if the things getting better, that hold the recovery of the credit needs and the risk performance accelerate in this year, we will also consider to adjust our growth pace.
This is our answer.
This is our answer. Thank you very much.
If there, I'd like to hand the call back to the management for closing. Okay. Thank you again, everyone, for joining us for the meeting. And if you have additional questions, please feel free to contact us offline. Thank you. Bye-bye. Thank you. That does conclude today's conference call. Thank you for your participation. You may now...
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