Q2 2019 Earnings Call

After todays presentation, there will be an opportunity to ask questions.

Now I will turn the call live with your speaker host today Ms. choice time, the company's Investor Relations Director. Please go ahead.

[noise]. Thank you operator.

Oh <unk> and thank you all for joining us on today's call feature has announced its first quarter 2019 financial results before the market opens.

And our news release is now available on the Companys IR website.

Today, you will hear from Peanuts, Childener, <unk> think I'm Lisa Allen.

Who will start off the call with a review of recent company. If you back them up strategic followed by the Companys CFO Mr., Stephen seem who will address financial results in more detail.

Before we proceed. Please note this call may contain forward looking statements. According to the Safe Harbor provisions one of my music Week. In addition reform Act or 1995.

It's a lot of these statements are based on management's current expectations and over the vision that you won't know one yet unknown risks uncertainties and other factors not under the company's control, which may cause actual results performance or achievements of the company to be materially different from the results.

All forward looking statements Ah if somebody called me why India entirety by the cautionary statements risk factors and details of the company's filings with the FCC. The company does not assume any obligation to revise or update any blown looking statements. As a result, you equalization future events changes in market conditions or otherwise, except as required by the law.

Please also note that the company will discuss non-GAAP measures to date, which I'm. Most hourly spend every it comes out to the most comparable measures reported under those.

Generally accepted accounting principles in the company's I need your knees and fighting with I think Steve.

Yeah, we might at back of such non-GAAP measures should not be review in isolation or as an alternative to the equivalent GAAP measures and that non-GAAP measures I know, you've only defined by all companies, including those in the industry.

Now looking at night I'm pleased to present Mr., Alan I didn't see often pick pack and let me go ahead.

Hello, everyone. This is Alan don't I was recently elected as a new term out paying tax a board of directors.

Oh, and I'm filling that role and responsibilities off the company's acting CEO .

During the Jewish Oh for Williams medical leave on behalf of the board of Directors I would like to wish I missed the Golden way a complete on a speedy recovery.

Well look forward to his return to the company.

As they go under oath.

Fintech I've always kept a close night relationships with the management team.

They've been paying attention to paying tax status.

Even with some challenges and adjustments I feel confident CPWM tag MTV transcended strategy in a business in the long run.

Well for 2018 annual report on July July Thirtyth 2019 today, what would discuss our results for the first half of 2019.

Which includes both the first and the second quarter of the year.

As the highlights of the company's performance during the first half of 2019.

The total volume of new loans that we facilitated were RMB 7 billion.

Which was decreasing compared to the same period of last year.

As we continue to face business environment changes funding structure off all loan facilitation business has changed with less reliance on P to P or Jim about funding.

At the year over year basis, the volume of loans funded either by non P to P financial partners increased by 36%.

Well the volume of loans that we facilitated.

Associations ways.

If you move box well PPP decreased by 60% of all the new loans funded by financial institutions.

Other than P to P or to move bugs as a percentage of the total volume increased to 70% in the first half of 2019.

It is our strategy to reduce reliance on T. move and to expand financial institution partners well continue to adjust our products for better feeling needs of clarity all financial institutions.

On the other hand, we will also use a newly acquired well investing <unk> lending licenses such as Michael lending licenses and factoring license to conduct Corporation was big It was both business partners and the financial institutions.

During the first half of 2019 total revenue were RMB 479.5 million equivalent to U.S. dollar 70 million.

A year to year decrease of 17% from RMB 577.7 million in the same period of 2018.

Gross profit was RMB 2007 274.6 million.

Well you asked all the 40 million.

Year to year over year increase of 16.3%.

Gross margin of the company expanded to 57.3% from 40.9% in the same period of 2018.

Net income was RMB 73.3 million or U.S. dollar 10.7 million a year over year increase so 492% from RMB 12.4 million in the same period of 2018.

Since our inception, we have committed to improve financial services.

With modern technology and operations.

Particularly our services to financial partners business partners and end users cover the entire Orange nation can't imagine process.

This has been the core of our business. Despite the relevance of our the tech solutions businesses, such as wealth management and insurance.

In line with the growth prospects of the China Financial service market and our company has been claimed to continue focusing on digital lending business, which will remain committed to strengthening services to financial partners.

We also plan to utilize our own financial licenses.

For better ecosystem.

Without those partners, we continue to maintain the leading positions in the installment payments market for 12, <unk> travel and mobile devices in the first half of 2019.

At the same time, well have expanded services into other income consumer industries, such as education.

In the travel segment made strides in make already our cooperation with leading online travel platforms, such as sea trip and Trina.

While also developing partnerships with offline travel service Cesar.

In the mobile device market, we have already established partnerships with two of the three largest mobile mobile telecom operators in China.

Wherever we launched a new partnership with several educational service providers.

By Pardoning Putney ring with the industry pioneers in different areas.

Well able to leverage that flourishing customer traffic and.

It was also tiv service offerings to consistently ongoing and the competitiveness of our product offerings.

In August .

We established a commercial factoring company with leading offline travel agency see the travel.

Through this partnership will offer installment loan payments service and provide integrated online offline shopping experiences to custom this off season and other third party platforms.

Well, we'll be able to explore additional smart lending opportunities together with <unk> with Caesars in the travel sector as well as other financial products.

Well be able to explore additional.

Oh this factor in company will integrate all state of art capabilities Big data risk control and.

Hi technology with our extensive experience is providing travel sector financial services.

Our partnership with Caesar marks another important milestone for expansion into the trouble installment loan sector.

We're confident that it will help us to improve our leadership in this sector.

By leveraging our market leading capabilities in Internet product Corporation.

Big data risk control and AI powered financing applications, we continue to capitalize on chinas booming consumer appliance market opportunity.

Regarding revenue segments first in the technical service segment.

We generate fees by providing technology technical services, such as traffic allocation Beacon NATO credit assessment.

And the post lending management to our financial partners.

Which will include commercial banks and other financial institutions.

Most most locations it is not paying tech, but all financial partners, who provide direct lending to the customer will serve more as the intermediary and provide limited or no guarantee to fund providers.

However in order to cultivate new partnerships, we have started to offer guarantee provisions during the onboarding period to build relationships with our new partners.

Because it is customary for financial institutions in China to require such guarantees one clubber rating with the intermediate.

Intermediaries, we anticipate that the increased proportion of our revenues with coming fun loan services, which will provide the guarantees or.

Credit assessment or credit enhancement for the short to mid term.

Therefore, as we accelerate the expansion of our financial partners basis through all available channels, our revenues from guaranteed loans will likely increase gradually as well.

Going forward, we aim to improve the flexibility and the diversity of our services as we plan our business.

I used to our lending licenses and other strategy.

Well will propel our partnerships with our financial partners and in return grow our revenue.

Same time also applying to actively market out industrial leading lending service platform and a full suit off a value added solutions to our financial partners.

We're confident that our cutting edge products offerings will help us to establish new partnerships.

Bolster existing collaborations and enrich customer stickiness.

Second in this installment service segment.

Well, primarily generate fees, both by providing financing services by using our own licenses and the by providing loans to borrowers who trust arrangement with financial institutions, such as truck license.

Would bear credit risk for most of the installment loans that way facilitate unrelated outstanding amount is reflected on our balance sheet.

As of today, but mainly generate installments service revenue for our factoring business, which focuses on the travel and e-commerce sectors.

Meanwhile, we aim to better utilize the online micro lending license that we obtained through acquisition in March.

As we test our new technologies through Michael lending operations will continue to identify areas, where we can further improve and optimize beyond. This upgrades. We also plan to cultivate more micro lending centric collaborations with institutional partners.

We believe that we can attract and retain business partners.

In a diverse set of industries by further utilizing our own lending licenses were also able to provide financial partners with high quality lending assets and their client base with good repayment track Records.

Third in the wealth management service segment, we have developed integrated financial technology solutions to meet diverse customer demands. This includes smart wealth management and the smart insurance brokerage services.

In summary in the past six months, we continue to optimize our tech Tech technical services drive modest global expansion and establish additional strategic partnerships with industry, leading business and the financial institution.

Going forward, we will also strategically focused on lending services, especially the service we provide to our financial partners.

As a fully utilize our lending licenses to deepen our relationship with both business and financial partners. We're confident that we'll generate sustainable revenue growth going forward.

In the end Fintech market in China is facing massive opportunities as well as pardon me readily treats currency, while going to make adjustments to accommodate such environments and to believe long term sustainability is more important than short term profitability.

Next I will pass the microphone to our CFO Steven to cover more information on financials.

Thank you Alan Hello, everyone before I start. Please note that unless otherwise noted all numbers stated in my remarks are in RMB terms.

In the first half of 2019, our total revenues were 479.5 million.

Specifically revenues from our technical service fees, which accounted for 80% of our total revenues declined by 4% to 383.8 million in the first half a penny 19.

From 399.7 million in the same period of 2018.

The year over year decline was due to the decrease of loan originations in the first half of 29.

Revenue from our installment service fees, which accounted for 17.1% of our total revenues decreased by 51.7% to 82 million in the first half of 2019 469.9 million in the same period last year.

The decrease was a result of reduction.

On book installment loan volumes.

Which is also in line with the decrease of our own on book loan business and part of our strategy to shift to an asset light model.

Revenues from our wealth management service fees increased by 69.4% in the first half of 2019 to 13.7 million from 8.1 million in the same period last year.

The increase was primarily attributable to the development and expansion of our wealth management services in particular, our insurance solutions.

Our cost of revenues decreased by 40% in the first half of 2019 204.9 million from 341.5 million in the same period last year.

As a percentage of total revenues cost of revenues decreased significantly to 44.7% in the first half a penny 19 from 51, sorry from 59.1% in the same period last year. The reduction was mostly due to a 59% decrease in our funding costs.

And 72.6% decrease in our provision for credit losses.

And 21.5 decrease in origination and services servicing costs during the first half of 2019 as we reduce our on balance sheet loan this loan balances.

Our gross profit as a result increased by 16.3% to 274.6 million from 236.1 million and our gross margin expanded to 57.3% from 40.9% during the first half of the 18.

The improvements in gross profit and gross margin were mainly due to the lower volume of our own book loan business, which led to lower funding costs and lower provision for credit losses.

In addition, we achieved better you can economies of scale across our business lines.

Our total operating expenses in the first half of 2019 increased to 218.6 million.

From 186.9 million in the same period last year.

Sales and marketing expenses decreased by 17.6% to 42.2 million.

In the first half of 2019 from 51.3 million in the same period last year.

Since the end of 2018, the company had begun optimizing its product structure and winding no. The offline course nine installment loan business offline diary marketing group disbanded would you spend it and offline marketing and promotion expenses decreased significantly as a result.

At the same time marketing efficiency improve significantly.

[noise], the general and administrative expenses increased 231.2 million in the first half of 2019 from 96.6 million in the same period last year. The increase was primarily due to the increased professional service fees associated with being a public company.

Bad debt provision staff costs and share based compensation.

Research and development expense expenses increased to 45.1 million in the first half of 2019 from 39.1 million in the same period last year.

As we continue to invest in our talent recruitment and enhance our R&D capabilities.

Operating profit in the first half of 2019 was 56 million compared to 49.2 million in the same period last year.

Our net income in the first half of 2019 was 73.3 million representing a year over year increase of 492% from 12.4 million in the same period last year.

Excluding share based compensation of 29.9 million.

Adjusted net income increased by 218% 203.2 million in the first half of 2019 from 32.5 million in the same period last year.

The increase in net income was due to the increase of gross profit of 32.7 million in accumulated and even accumulate the interest income from a loan to achieve.

Net profit attributable to ordinary shareholders in the first half of 2019 was 73.3 million as compared to.

Net profit attributable to ordinary shareholders of 20.8 million in the same period of 2018.

Dilute the GAAP and non-GAAP net income per ordinary shares were RMB 0.26, and RMB 0.36, respectively. In the first half of 2019.

Now, let's turn to our balance sheet.

As of June 30 of 2019, we had combined cash and cash equivalents restricted cash and short term investments of 730 million compared to 710 million as of December 31st 2018.

So the net financing receivables, including short term and long term decline to 646.3 million and the Ano Tony.

At the end of June 2019 from 761 million at the end of last year.

Mostly due to our strategy of low volume.

For our own but your Standalone services and shifting to an asset light model.

This concludes our prepared remarks for today operator, we are now ready to take questions.

Thank you, ladies and gentlemen, who will now begin the question and answer session.

If you wish to ask a question. Please press star one telephone Lake.

The cancer the required.

Okay.

Once again for your question. Please press star one.

Huh.

Our first question comes from the line of.

Alice shy of China Renaissance. Please go ahead.

Hello This is Alan.

Chinese Shannon friends and the question is.

Chinese tissue lending market is not growing Armstrong as a several years ago Oh, what do you think it will influence the our current lines it snows in contact and what as to the direction of impact embedded in this market. Thank you very much.

[noise] Hi, Allison. This is Alan don't I think the observation with regard to offer China Fintech co lending and sector does not grow as dramatically as a couple of years ago I think.

It's a restriction of the structure because most of the existing leading fintech companies focus on particular sector to make loans.

But we believe the overall retail lending sector of China is still.

Pretty big and.

The whole fintech industry.

More focus on particular sector and it is going to expand into the whole spectrum of the borrowers.

For example, most of Fintech companies, so what industry was focusing on people with less credits.

Data network with no credit data, but.

Actually more and more mature customer base will have similar demand in this sector. So I believe.

The further growth of retail finance markets.

We'll continue and for US it's more of building a diversified portfolio.