Q3 2023 Qifu Technology Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Chi Foods technologies third quarter.
On this conference call at this time, all participants are a listen only mode.
This presentation, there will be a question and answer the question.
If you wish to ask question. Please.
All but one.
Got it.
Please also note that this pre recorded I did talk about likelihood of conference call local currency.
All capital market. Please go ahead Kevin.
Thank you Hello, everyone and welcome to the Q4 technology third quarter at 223 earnings Conference call.
Our earnings release was distributed early aggregate and is available on our IR website.
Joining me today on this too.
Sure.
We'll move to Alex <unk>, our CFO and make Oh.
No.
Before we start I would like to refer you to our safe Harbor statement in the earnings press release.
Which applies to this call as well.
Certain forward looking statements.
Also this call includes discussions of certain non-GAAP financial measures.
Please refer to our earnings release, which accommodates a recalculation of non-GAAP financial measures to GAAP.
Measured.
Also please note that unless otherwise stated all figures nation English cool alright.
Ken.
Before we start. Please also note that todays prepared remarks from our CEO will be delivered in English using an AI generate ticket voice now.
Now I will turn the call over a white shirt. Please go ahead.
Hello, everyone.
Thank you for joining our third quarter earnings conference call.
Since the start of the year.
Some of China's macroeconomic recovery has softened after rebounding earlier in the year with effective demand for consumer credit also coming in weaker than expected. We promptly adjusted our strategic approach to this new market environment by diversifying our customer acquisition channels and refining operations.
All with a clear goal of driving high quality growth and improving profitability.
Efforts yielded solid results in Q3.
By the end of the quarter our platform empowered a total of 155 financial institutions and cumulatively served more than 49 million users with approved credit lines total loan facilitation and origination volume on our platform reached RMB $123 1 billion up roughly 11% year over year.
With the quality of our earnings further improving our non-GAAP net income for the quarter increased by approximately 14% year over year.
In todays context macro environment. It is particularly important that we expand our safety cushion by improving profitability to achieve this we are optimizing resource allocation across customer acquisition products risk management and asset distribution to boost operational efficiency.
And ultimately drive bottom line growth.
Now I'll walk you through some of the progress we made in this regard during the quarter.
To start with we continue to explore diversified customer acquisition channels and deploy innovative approaches to attract new customers.
Which not only improved customer acquisition efficiency, but also resulted in notably better quality of new users.
In terms of optimizing our customer acquisition channels, we established a partnership with a leading short form video platform through our embedded finance business in the third quarter leveraging the platforms massive active user base and our ability to accurately profile users and identify risk we have consistently maintained a leader.
Market share on the platform since the start.
During the quarter, our embedded finance business generated an impressive 46% sequential increase in the number of new users with approved credit lines approximately 33% of total new users with approved credit lines. During the quarter were acquired through the embedded finance channel.
We also intensified our marketing efforts through innovative marketing approaches during the quarter to attract high quality customers.
It was done by deploying more compelling AD placements to expand our customer reach.
Based on the user profile analysis uses acquired through innovative marketing methods significantly outperformed those obtained through conventional methods in terms of educational background mortgage and credit history.
They also clearly have better risk performance in terms of short term delinquency rates as we observed during the first three months.
Our innovative customer acquisition strategy firmly in place the proportion of high quality users increased by more than four percentage points from July to October is not only directly complements our existing user base, but also contributes to the stability of our overall risk performance.
As a result of these initiatives.
Number of new users with improved credit lines increased by 18% in Q3 sequentially.
While unit customer acquisition cost increased only slightly.
Moving on to product design, we introduced a loyalty program to enhance engagement of existing users by offering a wider range of value added services, we are effectively enhancing user engagement and retention, which increases our revenue and profit per user uses who joined the loyalty program demonstrated higher engagement with a double dip.
The increase in both the rate of drawdown and the number of loans borrowed over a certain period of time.
Turning to risk we swiftly responded to the changing market environment in Q3, we gradually tightened credit standards and upgraded risk models in particular, we further enhanced the knowledge graph for our broadly defined SME segment.
Closely analyzing relationships among individuals businesses and industries, we improved our ability to identify risks within the segment. It's worth noting that there are clear differences between our broadly defined SME segment and Smes in the traditional sense as it primarily younger enterprises acquired through online channels when conducting risk assessed.
And as we place more emphasis on individual credit history unused business data as a secondary reference.
As a result credit lines extended to our SME segment are usually smaller making associated risk and much more manageable compared to the consumer segment. The SME segment generates much more stable demand and stronger growth potential with similar risk performances.
Looking ahead, we are confident that there is significant room for growth and value generation over the long term for our broadly defined SME segment, driven by our accurate user identification and differentiated operations.
Lastly, we kept pricing at stable levels and leveraged our funding strengths to further optimize our economic model.
With a relatively ample liquidity in the financial system during the quarter.
We further optimized our funding structure by increasing the proportion from larger banks, which reduced our funding costs by another 20 basis points.
In terms of ABS, we secured ABS investments from multiple stay tuned and joint stock banks in TARP securities firms, leading to a 47 basis point decrease quarter over quarter and ABS issuance costs.
With the accuracy of user profiling and identification continuously improving we also further expanded the range of our financial institution partners strengthening our ability to serve various loan asset segments with more financial partners coming on board under the ICD or referral model, which further mitigates risk.
Our ability to engage with the lower tier user segment has significantly improved as we continued to optimize asset allocation efficiency, we expect overall profitability to further improve going forward.
Now, let me share with you the progress we made on the technology front.
Our technology solutions business is making solid progress as we expand the array of solutions, we offer to cover the entire credit process.
During the quarter, we entered into partnerships with three additional financial institutions, each from a different category and joined stock Internet and private bank.
To cater to the diverse needs of our banking partners. We adopted various deployment models and are committed to providing them with end to end technology solutions as well going forward.
We will extend our end to end technology solutions to more financial institution partners to scale up our client base in the long run we expect a steady increase in the take rate for our technology solutions business.
Additionally, we continued to invest in cutting edge technologies, such as artificial intelligence and large language models.
On September 18th we partnered with the China Academy of information and Communications technology to officially unveiled the first domestic standard for large language models in the financial sector.
Standard will serve as a crucial reference and benchmark for the design development application and review of large language models and finance.
At the same time, we purchased hundreds of graphics cards and have been exploring the application of Aig's C technology to improve efficiency throughout the entire credit process by conducting tests or implementing it and advertising telemarketing loan collection and quality control.
For example, our telemarketing system is now able to conduct semantic analysis and extract valuable leads from each conversation improving our telemarketing conversion rate by more than 5%.
In addition around 70% of our image based marketing materials are currently generated by AIG.
In the future we will use large language models to tagging right. These materials from multiple dimensions to optimize AD placements and boost marketing effectiveness.
Looking back at the past three quarters despite.
Despite a challenging macro environment, we remain.
Vigilant about market conditions.
And improved our earnings quality by further optimizing operations and fine tuning our business model.
Since Q3, certain macro indicators are showing margin improvement as a result of multiple supporting policies against this backdrop, we are confident in our ability to continuously make breakthroughs and create value for our shareholders with better results.
With that I will now turn the call over to our CFO Alex Hu.
Who will walk you through our financial results for the quarter.
Okay. Thank you Hi, Shannon good morning, and good evening, everyone welcome to our third quarter earnings call.
Facing slower than expected macro recovery and the worsening consumer sentiment, we proactively took actions in Q3 to optimize our product and service offerings.
Strengthen our relationship with users and key partners aiming to drive long term sustainable quality growth.
In Q3, we saw some volatility in asset quality and key leading risk metrics start to fluctuate from historical historical best levels achieved in previous quarters.
If anyone delinquency was four 6% in Q3 versus four 2% in Q2.
Taking day, one delinquency, mainly reflect the borrowers negative sentiment towards the ongoing macro uncertainties.
Certainly the collection rate was 86, 7% in Q3 versus 87, 2% in Q2.
This modest decline also was driven by macro weakness.
Throughout Q3, we have proactively adjust our risk management models and gradually applied more restrictive standards. Our incoming applications by late September we start to see stable credit quality among new borrowers.
As economic conditions remain challenging we may continue to see some fluctuation of these metrics in the near future. Although overall risk level should still be manageable with our continued effort to proactively mitigate risks.
Total net revenue for Q3 was $4 3 billion versus $3 9 billion in Q2, and $4 1 billion a year ago.
Revenue from credit driven service capital heavy was $3 1 billion in Q3 compared to $2 8 billion in Q2, and $2 9 billion a year ago. The year on year growth was mainly due to growth in on balance sheet loans.
Harshly offset by decline in expected average tenor of the loans.
The sequential increase.
<unk> growth in loan balances as well as continued improvement in effective handlers all of them.
Balance sheet loans account for over 19% of total loan volume.
Overall funding cost further declined by roughly 20 bps.
With the help of our strong relationship with financial institution partners as well as addition, additional issuance of ABS.
Revenue from platform service capital Light was $1 2 billion in Q3 compared to 1.1 building in Q2, and the $1 2 billion a year ago.
The sequential growth was mainly due to continued improvement in overall effective tenor of the loans and strong contribution from IC.
Substantially offsetting the decline in capital light loan facilitation volume.
For Q3 capitalized loan facilitation IC and other tech solutions combined account for roughly 56% of the total loan volume compared to roughly 58% in prior quarter. We expect this ratio to be roughly stable around this level for the year, we will continue.
To evaluate different components of our operation and seek a better mix between risk bearing and non risk bearing solutions based on macro environment and operational conditions.
In Q3, we saw continued sequential improvement in revenue take rate for both kept heavy and <unk> business as early repayment ratio gradually returned to normal levels and effective tenders congratulate extend it.
During the quarter average IRR of the loans, we originated and all facilitated remained stable Q on Q.
Well within the regulatory rate cap requirement looking forward, we expect pricing to be fluctuating in the narrow band around this level for the coming quarters.
Sales and marketing expenses increased 21% Q on Q, but declined 15% year on year.
We added over one 7 million new credit line users in Q3 compared to $1 5 million in Q2 unit cost to acquire new credit on user also increased modestly Q on Q to 306 from 296 in Q2.
Well, we will continue to drive for efficiency in our operation we may adjust the pace of our new user acquisition based on macro conditions from time to time.
Joe mentioned, we have made notable progress in diversifying our user acquisition channels during the quarter.
Well, we will continue to focus on reenergizing existing user base as it repeat borrowers historically contribute vast majority of our business.
As macro uncertainties persist and the credit quality of fluctuate.
We will continue to take a prudent approach to book provisions against potential credit losses.
Total new provision for risk bearing loans in Q3 or approximately $2 1 billion.
And write backs our previous provisions were approximately 600 million.
Provision coverage ratio, which is defined as total outstanding provision divided by total outstanding delinquent loan balance between 90, and 180 days or 534% in Q3 compared to 511% in Q2.
non-GAAP net profit was $1, one 8 billion in Q3 compared to 1.15 billion in Q2.
Effective tax rate for Q3 was over 22% compared to our typical ETR of approximately 15%.
The higher ETR in Q3 was mainly due to additional withholding tax provision related to cash distribution from onshore to offshore for dividend payments and share repurchase programs. Please also note. Our second quarter earnings was helped by a tax rebate of approximately one.
$160 million.
Excluding the tax rebate non-GAAP net income actually grew approximately 16% sequentially in Q3.
With solid operating results and stable contribution from capital light models, our leverage ratio, which is <unk>.
Mind as risk bearing loan balance divided by shareholders equity was three five times in Q3 near historically low compared to three eight times a year ago.
We expect to see the leverage ratio fluctuate around this level in the near future.
We generate approximately $1 2 billion cash from operations in Q3 compared to $1 8 billion in Q2.
The decline was mainly due to the change in working capital at the end of the quarter total cash and cash equivalent was $8 2 billion in Q3 compared to $8 5 billion in Q2 non restricted cash was approximately $4 9 billion in Q3 compared to $5.
<unk> 3 billion in Q2.
The sequential decline in cash position was mainly due to increased cash usage in our on balance sheet lending.
As we discussed earlier, we will continue to look for opportunities to deploy resources to launch new initiatives developed new technologies and expand services offerings.
As we continue to generate healthy cash flow from operations. We believe our current cash position is sufficient to support our business development and to return to our shareholders. In June 20th 2023, we announced a share buyback program to repurchase up to $115 million.
Over a 12 months period.
As of November 16, 2023, we have bought approximately $80 million worth of Avs in open market at an average price around 16 to U S. Dollar.
We will continue to execute the buyback program in accordance with the related rules and regulations with a fully execution of the repurchase program and the dividend plan the combined payout ratio will exceed 50%.
Going forward, we will continue to optimize our capital allocation plan and make timely adjustments to generate attractive returns to our shareholders.
Regarding our outlook well.
Macro.
Covered appear slower than expected, we remain confident to achieve our operational targets for the year as such we now expect Q4 total loan volume to be between $116 billion and $126 billion and for the full year total loan volume to be between.
RMB 473 billion and RMB 483 billion, representing year on year growth of 15% to 17%.
As always this forecast reflects the company's current and preliminary view, which is subject to material changes.
With that I would like to conclude our prepared remarks, operator, we can now take some questions. Thank you.
We will now begin the question and answer session to ask a question on the phone. Please press star one one and wait for a deemed to be handouts, if you will.
I can't say a request you can press star one.
One again.
For those who can speak Chinese please.
Ask your question in Chinese first followed by English translation.
In order to have enough time to address everyone on the call. Please keep it to one question one follow up and return to the queue more questions. Thank you.
So the first question.
Our first question comes from the line of our reach achieve from Morgan Stanley. Please go ahead.
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Okay. Thank you I want to highlight that the prepared remarks, just now delivered it was generated by our larger language model.
But for our Purion cards I'll still answer the question in Chinese.
Regarding your question stepping into Q4, we have upped the credit demand slightly trending down in particular credit demand was soft in October due to the seasonality factor during the national holiday and after that it can maintain stable into November.
The second lens perspective, the credit demand from broadly defined as any segment slightly better than our customer by sector and region.
Diverging from industry perspective for example, the service sector like Sports Entertainment and also the technology sector Applecare and the others.
Compared to the consumer segment.
Broadly defined.
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Through our customer experience and gas as.
As well.
Here, we would like to emphasize our broadly defined.
Users are totally different from traditional.
I've got a ticket guy is much smaller and our risk model are more based on individual profiling with the business data as supplementary information and therefore, the risk performance of our broadly defined.
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As this segment normally has urgent and higher credit demand.
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Regarding the funding cost our cost of funding declined by 20.
Dip sequentially in Q3, with our Aps issuance costs down by 47.
And our current funding cost is quite similar to Q3 level.
From a rate cutting perspective.
Particularly a rate cutting can drive down the funding cost of financial institutions, and eventually benefit to the real economy.
Due to the complex macro environment.
We didn't have that much.
Funding cost decline this year was mainly driven by the supply and demand dynamics.
In the market as the founding partners allocated more resources to consumer loan assets when the market alone is underperforming.
Given the scarcity of our assets, we manage to continue to optimize our funding costs in this year.
However in September there is some other sectors, including government financing property sectors are also attracting found inflows, which may put pressure on the further reduction of our funding cost.
We will continue to occur.
Going forward, we will continue to optimize our funding structure and keep the pace or even expand our ABS issuance to maintain our competitive advantage from the founding pack.
And maintain our funding cost at a stable level.
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Thank you for the questions.
Move on to the next question from Alex Ye from UBS. Please go ahead.
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Recent for closing of fluctuations in Q3.
Is it more driven by the macro environment or some of the industry specific.
Such as your collection efficiency and what's the latest trend in Q4 in the most recent boxes and the second question is on the loan pricing outlook. So.
We have seen China lower in the mortgage rate for the year.
It's the same mortgages.
So that kind of a backdrop.
Is that the current.
A lower interest rate environment to also.
Translate into somewhat.
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Fluctuation of our asset quality in Q3 was mainly a result of <unk>.
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First from a macro perspective, the key macro indicators at below the.
The second reason is that true.
To their credit in this case in the sense that the liquidity is typically better in the first half second half, which led to some penetration of our asset quality. In Q3. However, we expect this titration is pressured, especially the liquidity situation will improve in early next year, which.
They help improve the risk performance of our new loan issued in Q4.
At the same time reached with really adjusted our operations by upgrading our user base tightening our credit assessment criteria and reducing the exposure of our existing popular Inc. Q3, Accordingly, our early risk indicators for new loans.
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By 5% sequentially in September and we expect it to continue to improve in October.
And in Q4, we have further strengthened our risk management tools from three aspects first we incorporated the scorecard data from the Internet platform and appeared joined model with dose pass one second.
We deep dive into our internal data and upgrade our regular base scorecard by further leveraging our app data and <unk> data.
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Larger language models.
Risk analysis, aiming for an integrated piece scorecard and further improved screening capability by the end of November.
Third we will upgrade our post lending risk models and generate fast responding be scorecard rating system by end of December primarily based on reason standpoint, which is more helpful.
<unk> identified new risks.
Putting together all of these efforts, we expect the risk performance of the new loans originated in November.
And that will stabilize.
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Regarding pricing I would say from our intention perspective, we will conduct different price intact.
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User stickiness and satisfaction.
More attractive pricing, we are also able to acquire quality you use it to improve our user needs.
Meanwhile, we will also raise our pricing for higher risk.
Combined our average pricing will continue to keep stable.
And the current macro environment.
Finance is also one of the main.
Consumption in economy ended the current regulatory system.
In multi layers of Pi system for the consumer credit industry.
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Hi, Alex.
Thank you Alex.
Just had a question.
One moment for the next question.
Next question comes from the line of MRC.
In America.
Please go ahead.
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Triple play Tiger Lake all at home strong healthy GDP.
Yes sure John.
Yes.
<unk>.
Uh huh.
Do you think on sort of wake up.
My question is about your.
Shareholder capital return.
Alright.
You continue to buyback shares.
At current level.
And I just wanted to ask whether you will continue to do the buyback and after the completion of the buyback.
Buyback program.
You divulge more buyback program in the future.
Okay.
I will take this question.
As you said, we already did.
80 million repurchase since June 20th.
<unk> ahead.
Timeline.
And obviously.
Obviously, we'll continue to execute the current.
Purchase program.
Throughout the remainder of the year.
And also into a into next year.
We already.
Structured internally, a very kind of a comprehensive system.
<unk> periodically review, our cash position as well as the use of the deficient usage of the cash.
To compare.
The expected return between the reinvestment in operations.
And the returns generated from either the buyback or the or.
The dividend payment.
This kind of a review we will determine which is the best way to deploy additional cash or additional resource.
In the future so.
After we complete the current buyback program as well as the this year's dividend.
Plan, we will do.
New review.
Based on the cash position at that point.
And.
To make necessary changes to.
To the shareholder return program.
Either through buyback or through dividend or through some kind of a combination of the both.
Summary, basically.
The logic behind our future cash deployment.
Based on whichever methods.
Can generate the highest shareholder return.
Then we will use the cash to that direction.
Thank you.
Yes.
Thank you.
To put the questions one moment for the next question.
Next question, we have the line from Sandeep <unk> from China Renaissance. Please go ahead.
How about just your line is now open the Q&A.
Piano play now what did it hurt your line please Hawaii.
Ladies and gentlemen.
Cooper Goldman person in Germany.
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When he came back.
Davidson.
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Did I answer Vishal.
Thank you Tony.
Thanks Jeffrey.
So my question. Thanks.
Thank you.
This opportunity. So my question is about our bank strategy as Paul capital Light.
<unk> asset can you help us breakdown the Cowen profit margins on.
Capital Light and capital have you and how does the management deal the propulsion.
Kevin.
Thank you.
So compared with circle of lung bottle.
Will come from being more focused on the profitability in 2024. Thank you.
Okay.
Susan.
She knows the town.
Women.
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What's the time integrate.
Sure.
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And how you're pushing that back.
Glen you with Antigua.
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Sure.
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Sandy.
Adding the profitability of our company.
Hi.
The light model I would say both cuts are heavy in our capitalized loan facilitation model generates a roughly 3%, let's take rate with capital heavy a little bit higher than 3% and the capitalized a little bit lower but pretty close to 3%.
In terms of the loan mix, we will balance profitability and long term housing is.
Loan portfolio and keep a dynamic.
<unk> category.
Regarding the importance of low volume versus profitability I would say, it's just not our priority to either pursue loan growth.
Prestige profitability improvement.
We only pursue profitability, we can get to.
Heavy business like some other platforms.
Our target is to balance perfect ability and the long term housing and the sustainability of our loan portfolio. So we expect loan mix, we will maintain largely stable in the foreseeable future.
Thank you.
Yes.
Probably want to add one.
Little point here is that.
This year in total.
'twenty three because the.
The macro factors and also because the first half of the year.
We're facing a tough comp in terms of pricing versus last year.
Why you see the productivity profitability grows.
Slower than the non volume growth for 2023.
I will say this kind of negative factors related to probability.
It's already behind us so in the future years, we will try to at least maintain the same pace in terms of between the volume and the profitability. If anything we tried to also drive some additional operating leverages.
In the future.
Thank you Cindy.
The questions.
Our next question comes from the line of Lee from CIC. Please go ahead.
Yeah, I'm going to say.
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Sandra.
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Yeah.
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The take rate I would say in Asia to all we will see some fluctuation in terms of our credit costs in our funding costs. In this regard will further fine tune our operations optimize our funding structure and invest more resources into R&D to improve our operational efficiency and falling.
Cost with dose.
Cost and efficiency in Pip.
We will mitigate larger native saturation. So we like to you to take away maintain stable in the short term.
Actually if you look at it.
Our take rate in Q3.
Actually in <unk>.
Sequentially from Apple to Apple pay started with diversified services offered to our users and optimizing our asset allocation.
Because we expanded our customer outreach in Q3, and adding additional tax costs related to our dividend.
Share buyback program it looks like our <unk>.
Take rate in Q3 maintain stable from last quarter.
From long term perspective, we will further improve our operational efficiency and we do hope to.
The increase in our take rate.
Yes.
Thank you.
Thank you I see no more questions from the phone line I would like to hand, the call back to management for closing remarks.
Okay. Thanks, again for everyone to join us for the call.
Have additional questions. Please feel free to contact us offline. Thank you have a good day.
Ladies and gentlemen that concludes today's conference call. Thank you for your participation you may now disconnect your lines.
Okay.
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