Yiren Digital Q2 2023 Earnings Call Transcript

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August 17, 2023

There are 6 speakers on the call.

Operator

Thank you for standing by, and welcome to the Year End Digital Second Quarter 2023 Earnings Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. And today's conference call is being recorded. I would now like to turn the conference over to Lydia Yu with Investor Relations.

Operator

Please go ahead, ma'am.

Speaker 1

Thanks, Keith. Hello, everyone, and welcome to our Q2 2023 earnings conference call. Today's call features prepared remarks by the Founder, Chairman and CEO of CreditEase and our CEO, Ms. Ernie Tang and our CFO, Ms. Na Mei.

Speaker 1

Before beginning, we would like to remind you that discussions during this call contain forward looking statements made under the Safe Harbor provision of U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today.

Speaker 1

Further information regarding future risks, uncertainties or factors is included in our filings with the U. S. SEC. We do not undertake any obligation to update any forward looking statements as required under development laws. During this call, we will be referring to certain non GAAP financial measures and supplemental measures to review and assess our operating performance.

Speaker 1

These non GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U. S. GAAP. For information about these non GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it on to Ming, our CEO, for opening remarks.

Speaker 2

Thank you all for joining our earnings conference call today. Before I jump into business updates for the quarter, I would like to first review our new corporate positioning, an AI and technology driven financial and lifestyle services platform. Our new positioning better aligns with our business model that is anchored by 3 key pillars: Financial Services, Insurance and Consumption and Lifestyle Services, with underlying business strategies and operational flows driven by AI technologies. The company's AI Lab, which was officially established last quarter, will focus on utilizing large language models and the generative AI technologies to build and develop new products and applications that will work across our business lines. A few examples of what we are working on include a customized virtual AI customer service agent that will be available to respond to customer inquiries 20 fourseven, as well as AI assisted marketing tools and AI productivity tools to enhance our productivity.

Speaker 2

I will continue to share more details and progress about AI during future earnings conference calls. Next, an update first on our insurance brokerage business. Total gross premiums reached more than RMB1.3 billion in the Q2 of 2023, up 67% year over year, of which life insurance policies increased 1 162% year over year. The spike in life insurance policy sales this quarter was mainly driven by the timing of the new regulation that requires life insurance companies to lower their pricing interest rate of newly developed products from 3.5% to 3% and to discontinue selling all products above 3% interest rate. As we continue to invest in product innovation and customization and agent development and digitization, we noted 3 key successes this quarter.

Speaker 2

Average 1st year premiums increased 15% quarter over quarter. The number of life insurance policy premiums exceeding RMB3 1,000,000 increased 2 0 6 percent quarter over quarter, and average productivity of our agents grew by 3 28%. On property insurance, as mentioned on our last call, reinsurance for overseas construction policies is the new key market we are focusing on and the total premium for this product segment continue to grow at a fast pace, increasing 77% quarter over quarter. Next, on financial services. In the Q2 of 2023, total loan volume was RMB8.2 billion, representing a 65% increase year over year.

Speaker 2

The total number of borrowers in the quarter increased 82% from prior year to 1,010,000. On Yixuanhua, which continues to be our fastest growing loan product, monthly active user number on our Yixuanhua APP continued to increase 11% from prior quarter to 2,400,000 and the number of average transactions per user increased to 3.2x this quarter, up from 2.1x from the Q2 of 2022, indicating a significant increase in RTV over tax ratio per borrower. Last quarter, I mentioned that we have started expanding internationally in which we hope to leverage our expertise in the consumer finance sector to promote greater financial inclusion worldwide. We launched in the Philippines last quarter under the brand Easy Peso and have seen rapid growth since. As our team continued to enhance local operational flows and refine our risk models, we have seen a continued improvement in margins.

Speaker 2

With initial success achieved in the Philippines, we have also started evaluating other regions and expect to expand to 1 to 2 new countries in the near future. On the funding cost front, as we continue to diversify our funding sources, we noted a 7% decrease in institutional funding cost in June as compared to beginning of the year. On asset quality, delinquencies remain stable with 15 to 89 days delinquency rate at 2.9% compared to 3.0% last quarter. On consumption and lifestyle services, total GMV generated this quarter increased 28% from prior quarter to RMB396 1,000,000. The total number of paying members this quarter increased 57% from prior quarter to 2,440,000.

Speaker 2

To conclude, I want to say that I'm really proud of our team for everything we've accomplished. So far, it's been a challenging few years, but I'm quite optimistic about the road ahead and grateful to you all for being on this journey with us. With that, I'll now pass it to Na, who will go through the financials for this quarter.

Speaker 3

Thanks, Ming, and hello, everyone. On this call, I will only focus on our key financial highlights. Please refer to our earnings release and IR desk for further details. In the Q2 of this year, total revenue reached RMB1.3 billion, representing 65 percent increase year over year and a 34% increase from prior quarter, showing strong financial performance despite a sequence more challenging macroeconomics this quarter. On financial service, we continue to see strong demand for our credit products with the total loan facility this quarter reached RMB8.2 billion, representing 27% growth over prior quarter as compared to analysis projection of an industrial average of single digit growth.

Speaker 3

Our insurance gross writing timing reached RMB1.3 billion, representing 57% increase year over year and a 44% increase from prior quarter, primarily driven by strong life insurance policy sales. Revenue from insurance broker service reached RMB404,700,000,000 for the quarter, increased 115% year over year and representing 31% of total net revenue. On subscription and lifestyle service, total GMV for this quarter reached RMB396 1,000,000,000, increased 28% from prior quarter. On the expense side, sales and marketing expense increased 40% to RMB149 1,000,000 from last quarter, mainly due to our start of investment in brand and marketing this quarter to drive our further growth. On general and service cost increased 73% from prior quarter to RMB346 1,000,000, mainly driven by increased on general and service costs relating to our insurance broker sector.

Speaker 3

Quarter over quarter, R and D and service expense as a percentage of revenue for the insurance sector has remained relatively stable and around 70%. G and A increased by a minus 5% quarter over quarter to RMB97 1,000,000. Allowance for counter assets and the receivables was RMB61 1,000,000 for this quarter, remaining stable and probably 0.7 percent of our total loan facility. On to our bottom line, we continue to deliver a strong profit of RMB127 1,000,000 this quarter, increased 24% quarter over quarter. We generally operated a RMB780 1,000,000 net cash from operating this quarter, an increase of 84% from prior year quarter.

Speaker 3

Total cash and cash equivalents was RMB5.8 billion at the end of this quarter. Early in June, we announced the acquisition of licensed financial guarantee company in China, which will enable us to provide financial guarantee growth and continue to enter our credit business segment and as well as other business models. Going forward, we'll continue to seek out opportunity for new initiatives and the strategy investment to foster business growth. Generally, we remain confident in our company's business fundamental and the growth opportunity. Therefore, we continue to execute on our share repurchase program.

Speaker 3

This quarter, we have declined close to US1 $1,000,000 to pay back our shares in the public market. As of June 30, 2023, the company has accumulated to fund around close USD3.5 million for our payback shares. Based on company's preliminary assessment of business and the market condition, the company projects the total revenue in the Q3 of this year to be between RMB0.9 billion to RMB1.1 billion, with net profit margin expected to remain stable. With that, we conclude our close remarks. Operator, we are now open for questions.

Speaker 3

Thank you.

Operator

Yes. Thank And the first question comes from Andrew Lian, a Private Investor.

Speaker 4

Hello, sir. My question is, the CEO is 50% owner of the company. I guess you want the stock price to increase. And currently the volume is I just calculated dividend is very low. Buybacks, they are very hard to do with this volume.

Speaker 4

Would you consider a dividend as JFIN, Giantech did a dividend? Also it will legitimize the company that it is official. Another question, the second question would be about your auditing. If you could go ahead and talk about the legitimacy of your numbers and the fact that it took 3 auditors and more than 1 year to get the latest financial statements audited. The company looks amazing on paper.

Speaker 4

It has like $800,000,000 in cash and $200,000,000 in market cap currently. So I'm very curious about the legitimacy of the numbers and why that happened. Thank you.

Speaker 2

Yes. Now we'll comment on the auditing question and I will answer the first question. We have no intention to delist the company because being a global leading fintech company is our strategic objective. We believe Yireo Digital is our flagship for that strategic initiative and current political challenges as well as what you may well know about the past few years, yes, now so stable market conditions regarding FinTech collectively have caused trouble in terms of valuation, not only for us, but also for other players in that sector. What we've been doing is to work very hard on digital fundamentals and also to do a better job communicating with the market regarding our strategy and operations.

Speaker 2

And you may remember that a few years back, we were a clear leader in the market and we are hoping and we are also confident with hard and smart work, we will regain our market leadership position. And also, we have a relatively large hedge position that can help us invest into the future, including things like AI and global expansion. As I mentioned, we are expanding to other markets, which is very promising direction in my view. AI will be very in my view. And my hope is that in 3 years' time, the company will be transformed into a new global FinTech leader.

Speaker 2

Yes. Thank you.

Speaker 4

But again, could you comment on the dividend policy? Like if you could do a dividend policy, Jaiyin Tech, it grew recently in stock price and in volumes. They're also owned by the CEO of 50%. I would like Mr. Ning Tsang, if he could comment on the possible dividend.

Speaker 2

I'm the founder. Yes. I'm Hello. Yes. Yes.

Speaker 2

I've been speaking. Yes. And this is noon. And we have currently no such dividend policy. Yes, we keep evaluating different possibilities, different strategies.

Speaker 2

But currently, our view is that, yes, this strong cash position can help us, yes, fend off any potential uncertain challenges and also investing for the future.

Speaker 4

Okay. But if you want your stock price to increase, couldn't you consider like the discount to value is very high, buybacks are out of question. Also another idea would be X Financial, XYF, ticker symbol. They bought back shares, they repurchased shares from directly from employees that have stock. Maybe you could consider that in increasing the daily trading volume in order to move the needle of the stock price and also the volume.

Speaker 4

So buying from employees, could you consider that?

Speaker 2

To be honest, we're also disappointed that we haven't been able to really deliver value regarding share price. That's why I just said that we would do try and do a much better job communicating with market stakeholders. But regarding employee shares, I believe our team members love to enjoy upside with the company and they also deserve it. So I very much want them to, yes, enjoy the upside as opposed to buying shares from them at this low valuation.

Speaker 4

Okay. Consider again the dividend policy introduction maybe for next quarters and consider J. J. Fin, which did this dividend policy and had a 3x, 4x stock price increase and volume entered the company, it's much more healthy right now because they made a big dividend, a 30% dividend yield in 6 months. So they're paying like 6% now and 6% later in 6 months or they paid 6% already.

Speaker 4

JFIN is similar to YRD in my opinion.

Speaker 2

Thank you for your suggestion. And now can you please answer the second question?

Speaker 1

Hi, Andrew. This is Lydia, Investor Relations. Just on your second question, can I quickly clarify with you first? Your question is on auditing. Because I know that we released our annual report this year in April, which is actually on par with kind of the average.

Speaker 1

So I just wanted to clarify on what you're asking on our earnings.

Speaker 4

Okay. Then that was resolved. It was just yes, the change from the KPMG. Yes, okay.

Speaker 3

Yes. So

Speaker 4

we're looking

Speaker 2

to fund

Speaker 1

annual support later just because there was a change in auditor. So it took some time for the new auditor to get satisfied with our other numbers. But for our 2022 annual report, it was released on April 28 this year.

Speaker 4

Yes. Okay. Thank you.

Speaker 1

Okay. Thank you.

Speaker 4

We'll consider that at the end.

Operator

Thank you. And the next question comes from Matthew Larson with Macquarie.

Speaker 5

Hello. Good evening. Thanks for taking my call. A couple of things on the subject of the buybacks. I got cut off and had to call back.

Speaker 5

So maybe you mentioned it. You're scheduled to buy back $20,000,000 worth of stock this year. You are volume constrained to a certain degree. But the volume over the last 2 months has averaged considerably higher than the 1st 6 months this year. What are the restrictions as far as you have when it comes to the amount of shares you can buy back on a daily or weekly basis, what percentage?

Speaker 2

Can now please answer that question regarding buyback?

Speaker 3

Yes. Yes, I will answer this question. As you mentioned, while we're performing our payback, we have to follow-up the restriction our shares provide amount. Basically, the limited restriction is that the payback amount company in front is no more than 50% of the average down weeks, the credit amount. So we have much not you're complies with the rule about the 50% to 20% of total marketing value.

Speaker 5

Okay. And if you could tell me how much have you bought back year to date of the $20,000,000 that was announced before the year started?

Speaker 3

Yes. As you mentioned, we announced the new Shell purchase payback program last year. And as mentioned in my script, as of June 30th year, the cumulative amount is US3.1 million dollars and the latest amount by today is about $5,000,000 for your reference, yes.

Speaker 5

Okay. So I mean you've been a pretty significant buyer. I mean it's going to be tough to get your $20,000,000 in there unless you get the volume up. Here's I've been a long term investor off and on with your company. I've been on the conference call before a few times.

Speaker 5

I frankly participated in your IPO when I was at Morgan Stanley in December of 2015 when you were a peer to peer lender and your stock had ultimately gone to $50 when that business was not as highly regulated by the governmental agencies in the PRC. But you've reinvented yourself. I mean, you're still a lender, I guess, a capital light lender, but your real growth seems to be from insurance and financial services and what have you. You still have a loan book of about $1,000,000,000 Do you keep any of those loans on your books since you've got $800,000,000 in cash? The regulatory authorities prefer that because that's what the banks have to do And the capital light strategy is great as far as a risk point of view to you all.

Speaker 5

But the more loans you keep on the books, I think would appease regulators. Can you answer that for me, please?

Speaker 3

Yes. I will answer your question. As you mentioned, we have so big cash balance in our finance statement. So actually, we have also used our own funding to service our own credit service such as we have cooperated with entrusted company this year and by now they have RMB600 1,000,000. We have cooperated with the trust to service our clients and we also have our own financial license company and so it's and we can also use this financial license to service the Xianhua.

Speaker 3

Yes, as I mentioned in my script, in June, we also upgraded the financial guarantying company and this financial guarantying company can also service our credit business and also have to cooperate with other funding partners. In the cooperation with the funding partners, our company can source direct guarantee service to our customers, which we are also a way to waste to cost our cash balance. Yes, of course, we will still keep on cooperating with other financial company to use our cash balance to service our business development. Thank you.

Speaker 5

Okay. Couple more questions. The previous caller commented on the stock price, which I always have. I mean, you trade for less than one times forward earnings. You trade at about 1 quarter of your cash balance.

Speaker 5

I mean these sorts of valuations would not exist anywhere on any exchange outside of the Chinese PRC stock. There are other companies that trade well below cash because there is a disillusionment in investing in the PRC right now. That can change. I believe in mean reversion, but people are distrustful, rightly so, of these sorts of valuations. The previous caller was asking about your auditors.

Speaker 5

But you're not alone. There's other companies that trade below it, but you are in particular. Plus, you're growing your earnings dramatically and your user base and what have you. In your news release, you mentioned in AI 3, 4, 5 times. In my judgment, you, your company and other FinTech companies have used AI or some aspect of AI for years.

Speaker 5

That's how you make your loan decisions from customers who use your service, you do a quick algorithmic review of their creditworthiness and then you approve it or don't approve it. And I think you need to highlight that. You put out very few news releases. The only ones that I've seen since the last earnings call was the announcement that you bought the Chongqing Jintong Guarantee Finance, which you just talked about. But you didn't mention whether it'd be accretive or really what it was going to do other than make a draw on the conclusions.

Speaker 5

But why don't you put out more PR, more news releases highlighting AI that you're an AI company, you always have been, and you should be valued like companies that are employing AI for their productivity growth. That's one of the problems. Nobody even knows about your company. When I'm on these conference calls, often I'm the only person or maybe one other person, you don't have any research coverage, even though you used to be followed by Credit Suisse and Morgan Stanley and companies like that, but they dropped covering you when your stock price got too low and also the previous caller mentioned another company XYF, which is a higher priced stock slightly. That was underwritten by Morgan Stanley as well.

Speaker 5

They don't follow that anymore. But it does trade at a higher multiple. And then the market leader in the consumer finance area, FinTech, which is QFIN, is about 5 times earnings and it trades like 2 times, 3 times book. So I expect and really demand that if you're interested in a higher stock price, which I assume you are, I mean, who would be, particularly when your stock used to be 20 times where it is. I mean, you must look back on those days and just wish because the personal wealth for your employees and yourself would be dramatically improved.

Speaker 5

So please get a company to be in charge of public relations and tell the story out there to investors. Many small priced stocks, even many from the PRC double or triple it a day on almost no news. Here you report a blowout quarter and you've got growth across almost all your business lines. And I don't think you may even noticed it. But for shareholders who have been patient, we would mind a little upward trajectory in the stock.

Speaker 5

So that would be a strong recommendation on my part. And let's see what else I have. I think that's it. So, you got to get the word out there. You have to keep using AI because what you're doing now, talking about AI, talking about your valuation, have you ever thought of doing a road show?

Speaker 5

I mean, there's I mean, if you had a $1 gain in your stock price, I mean, that would be a tremendous percentage gain. It would also make investors like myself significantly add to our positions, all right? I have had large positions in it. I do relatively so, but I'm reluctant to put more money in the money. I'm a financial advisor, because there's only so many $2 stocks that you can have in a client account as a percentage, otherwise you bump up against compliance issues.

Speaker 5

So the best way to get your stock up there is to get the word out, all right, talk about your AI initiatives. And as far as making share buybacks, if you're restricted by the volume by your broker and by the SEC rules, what about some insiders? I mean, all these employees who don't want to sell you their stock because they like they want to grow with it. It'd be nice if you had some that could buy 10 1,000 or something. That makes news.

Speaker 5

So you need somebody new in the PR area. My 18 year old son who is on Instagram and other social media, TikTok, he could take this story and triple your stock, I bet, just by getting it out there and getting 1 or 2 influencers to pick up the story, whether it's Reddit or WallStreetBets. I mean, does that make sense to you? I mean, your company is worth at least 4 or 5 times where it is now and that would still be undervalued, okay, that would be 4 times earnings. How about 10 times earnings, all right, with all the cash you have, 10 times, would your employees and would you all like to see your stock up tenfold?

Speaker 5

So that would be my suggestion. I think it's common sense, frankly. So I hope you take some of my suggestions and that of some of the other callers. And also just look at your stock price. Do you want to be at do you want to be a wolf or a mouse, I mean, to be honest with you.

Speaker 5

So, I appreciate your tremendous performance. Thank you very much. And that's all I have to say, but I hope to see some of these reforms.

Speaker 2

Got it. You'll see one more. Last time I heard you loud and clear. And now we have this AI, yes, more and more and yes. So appreciate that.

Speaker 2

We will double, triple our marketing communications effort. Yes, probably consider hiring your son for our marketing.

Speaker 5

Well, I'm not suggesting he's I'll make it clear. He's not doing this. I'm saying that a young person's skill set in going on Twitter, Instagram, TikTok, you name it. Just think if 1,000 people knew about your stock and they all bought $8,000 worth of stock. That's an $8,000,000 concentrated interest in it.

Speaker 5

And so that's how you get stocks to lift is getting more than just 1 or 2 people knowing about it. So anyway, he's not doing it, I want to make that clear.

Speaker 2

I look so pleased. But someone likes it. Absolutely. Absolutely. Yes, yes, yes.

Speaker 5

All right. So thank you very much. Have a great quarter. I'll continue to be an investor. But if the stock starts to lift, I buy on strength, okay, and in size, and I'm just one guy.

Speaker 5

So, please consider some of my suggestions because I've been on the buy side for 40 years. And what do you got to lose, all right?

Speaker 2

Yes, we will, Definitely.

Speaker 5

Very well. Thank you for your time. Thank you

Speaker 2

for being with us.

Operator

Thank you. And we have a follow-up question from Andrew Lillian A, a Private Investor.

Speaker 4

Hello, again. So following what was the other shareholders stated, I would like to add the dividend again and maybe doing just a 0.1 dividend is enough to catch some eyes of investors, like a 5% dividend. Again, I want to I don't know if you, Mr. Ning Tang, the CEO, knows Bingo Yan, the CEO of Giant Fintech. But they did the dividend, and it caught ice.

Speaker 4

And it did bring investors and volume towards their company. Of course, everything what the previous caller stated is valid and I would also do. But again, consider the dividend because if you do a dividend, I think it pops investors can see, which are searching for dividend plays, they might find your company and stumble on an insanely deep undervalued play. That's it. And sorry to repeat myself, but the previous caller did not state the dividend and yes.

Speaker 2

Got it. We heard you. We will yes, work on evaluating these and other possibilities.

Speaker 4

And roadshows will help also.

Speaker 2

Okay. Thank you. Thank you.

Operator

This concludes the question and answer session as well as the call. Thank you for attending today's presentation. You may now disconnect your lines.

Speaker 2

Thank you all very much for these constructive remarks and comments, suggestions. We will work along these lines.

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Yiren Digital Q2 2023
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