Qifu Technology Q2 2023 Earnings Call Transcript

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August 21, 2023

There are 7 speakers on the call.

Operator

Ladies and

Speaker 1

gentlemen, thank you for standing by, and welcome to the Qifu Technologies Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please note, today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Karen Ji, Senior Director of Capital Markets.

Speaker 1

Please go ahead, Karen.

Speaker 2

Thank you, operator. Hello, everyone, and welcome to Qifu Technologies' 2nd quarter 2023 earnings conference call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Wu Hai Seng, our CEO Mr.

Speaker 2

Alex Xu, our CFO and Mr. Zheng Yan, our COO. 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 we will make certain forward looking statements. Also, this call includes discussions of certain non GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non GAAP measures to GAAP measures.

Speaker 2

Also, please note that unless otherwise stated, all figures mentioned in this call are in RMB terms. Now I will turn the call over to our CEO, Mr. Hu Hai Shen. Please go ahead. Hello, everyone.

Speaker 2

Thanks for joining our 2nd quarter earnings conference call. During the quarter, given the macroeconomic recovery and a more cautious sentiment among consumer credit users, we remain committed to our prudent operating strategy and pursued meaningful growth while maintaining stable risk performance. In Q2, total loan facilitation and origination volume on our platform reached RMB124.2 billion, up 26.4% year over year and 13.5% quarter over quarter, reflecting an accelerated growth trajectory compared to Q1. By the end of Q2, our platform had Throughout the year, we have made steady progress in advancing our strategic upgrades to further improve profitability, While seeking high quality growth, this will allow us to increase the margin of safety and strengthen the resilience of our business model against Macro environment. In terms of business growth, we have continued to expand and diversify our customer acquisition channels By partnering with multiple leading traffic platforms under the embedded finance model, we have effectively expanded our coverage to the targeted users.

Speaker 2

We have also developed products tailored to different consumer and SME profiles, addressing varied users' needs and providing additional growth engines for our business. In terms of profitability, we have taken further steps to boost Operational efficiency, reduced funding costs and improved risk assessment capabilities to optimize asset allocation and improve the overall profitability of our loan portfolio. Now let me share some of our highlights in the Q2. First, we continue to Spend and diversify our customer acquisition channels while leveraging innovative approaches to improve marketing efficiency. In July, we entered into partnerships with top tier traffic platforms, including short form video platforms and payment providers To tap into their massive active user base, through joint modeling, process innovation and the tailored user identification strategies, We boosted user conversion and enhanced our ability to reach targeted users.

Speaker 2

With marketing spending largely flat from Q1, The number of new users making drawdowns increased 16% sequentially. Furthermore, we offered some experimental compelling rates to boost engagements in a more innovative and effective way with high quality users with stable credit needs, Stronger intention to borrow and an appetite for larger credit lines, which also serves as an effective supplement to our Moving forward, we will continue to explore effective ways to acquire and manage users from various segments and address their diverse needs through product innovations. 2nd, we improved our user engagement capabilities and achieved a significant boost in user activity. Starting from user needs, we optimized our product risk and operational strategies throughout the user lifecycle. We also enhanced our ability to identify users by leveraging PBOC credit data as well as data related to the broadly defined SME segment.

Speaker 2

This enabled us to offer more competitive rates and credit lines and a more flexible repayment method catering to varied users' needs, while ensuring the stability of our risk performance. As a result, we saw a notable improvement in drawdown intention among new and existing users. In addition, through our diverse user outreach and engagement approaches, The 1st month's drawdown ratio of new borrowers increased by approximately 13% from Q1 and the debottlenecking rate of existing borrowers, meaning the average percentage of existing borrowers with an outstanding loan balance That drawdown against the following months increased by approximately 8% from Q1. On top of this, We also introduced user loyalty programs and offered a broader range of products and benefits to boost users' engagement. 3rd, we kept our pricing and risk performance at stable levels, Leveraging funding strength to further optimize our economic model.

Speaker 2

During the quarter, our deepened cooperation with financial institutions contributed to a further reduction in our funding costs that far outpaced the market rate cut. In addition, through innovative product design, we secured ABS investments from multiple state owned banks and the Major Joint Stock Banks. We issued roughly RMB5.3 billion of ADS in the quarter, up 132% quarter over quarter and leading to a further reduction in our overall funding costs. As our credit assessment capabilities steadily improve, we are collaborating with a broader spectrum of financial institutions, which will enhance our ability to optimize asset allocation and boost profitability. 4th, our Technology Solutions business advanced steadily and has begun to take shape.

Speaker 2

We further optimized our product metrics and solutions to address the diverse needs of our banking partners. In terms of organizational development, We assembled a sizable team capable of providing professional service to financial institutions. Small and medium sized banks are particularly keen to push forward the digital transformation with the support of our end to end tech solutions. A number of projects are currently in the implementation phase. Looking back at the first half of twenty twenty three, despite the softening macroeconomic environment, we balanced the growth and risk through our prudent operational practice and delivered solid results.

Speaker 2

In the second half, we will further expand our channel Our business model will enhance the resilience of our company in today's macro landscape. We are confident that our industry position and unique resource and capabilities will enable us to sustain our leadership position in the credit tech market and deliver even more robust growth in the long term. On June 20, we announced a share repurchase program under which we may repurchase up to $115,000,000 worth of shares over the next 12 months. Since the announcement, we have been actively executing the program. We have strong confidence in the company's long term profitability and cash flow performance and remain committed With that, I will now turn the call over to our CFO, Alex Xu, who will walk you through our financial results for the quarter.

Operator

Okay. Thank you, Haixiang. Good morning and good evening, everyone. Welcome to our Q2 earnings call. Despite the slower than expected micro recovery, we continue to see modest improvement in many aspects of our operations throughout the first half of the year.

Operator

Users' activity levels measured by drawdown ratios continue to improve in recent months, which led to the accelerated loan volume growth in Q2. Although the pace of macro recovery is still uncertain, We are proactively taking some actions to optimize our product and service offerings, strengthen relationship with key partners and ultimately to drive long term sustainable quality growth. In Q2, the quality of our user base remains solid. Key leading risk indicators were relatively stable near the best level of recent quarters. Day 1 delinquency was 4.2% in Q2 versus record setting 4.1% in Q1.

Operator

The slight uptick in Day 1 delinquency somewhat reflect borrowers' sentiment toward the ongoing macro uncertainties. 30 day collection rate was 87.2% in Q2 versus 86.2% in Q1. This sharp rebound mainly reflects seasonal factors as well as some improved collection efficiency. As economic recovery remain uncertain, we may continue to see some fluctuation of these metrics in the near future. Although overall risk level should be relatively stable in our continued effort to proactively mitigate risks.

Operator

Total net revenue for Q2 was $3,900,000,000 versus $3,600,000,000 in Q1 and $4,200,000,000 a year ago. Revenue from credit driven service, Capital Heavy was $2,800,000,000 in Q2 compared to $2,600,000,000 in Q1 $2,900,000,000 a year ago. The year on year decline was mainly due to overall decline in expected average tenure of new loans as well as a lowered average interest rate. The sequential increase reflects growth in loan volume under captive heavy and the relatively stable effective tenants. Early repayment levels were relatively stable in Q2 versus Q1.

Operator

Our balance sheet loans continue to grow nicely and account for nearly 19% of the total loan volume. We issued a record 5,300,000,000 ABS, of 143% and 132% year on year and sequentially respectively, which helped us further lowered our overall funding cost and drive for better utilization of our microlending licenses. Revenue from platform service, Capital Light was $1,130,000,000 in Q2 compared to $969,000,000 in Q1 $1,240,000,000 a year ago. The year on year decline was mainly due to Overall decline in expected average tenure of the loans and also the modest decline in average pricings. For Q2, Captain Light Loan Facilitation, ICE and other technology solutions combined account for roughly 58% of total loan volume compared to roughly 56% in the prior quarter.

Operator

We expect this ratio to be gradually trending down for the remainder of the year to a normalized level. Also, we are evaluating different components of our operations and seeking a better mix between risk bearing and non risk bearing solutions based on macro environment and operational conditions. During the quarter, average IRR of the loans We originated and or facilitated remains stable Q on Q, well within the regulatory rate cap requirement. Looking forward, we expect pricing to be continued relatively stable for the coming quarters. Sales and marketing expense increased slightly Q on Q as we remained prudent and continued To diversify user acquisition channels, we added approximately 1,500,000 new credit line users in Q2, roughly flat versus Q1.

Operator

Unit cost to acquire a new credit user also increased marginally Q on Q at approximately 296. While we will continue to drive for efficiency in our operations, We may adjust the pace of our new user acquisition based on market conditions throughout 2023. Meanwhile, we will continue to focus on reenergizing existing user base as repeat borrowers historically contribute vast majority of our growth. Although we will continue to take a prudent approach in booking provisions against potential credit losses, We should expect further write back of provisions from previous periods as overall risk profile of our loan portfolios has been stabilizing to improving. Total new provision for risk bearing loans in Q2 were approximately $1,900,000,000 and the write backs of previous provisions were approximately $525,000,000 Provision coverage ratio, which is defined as total outstanding provision divided by total outstanding delinquent loan balance between 90 days and 180 days or 5 11% in Q2 compared to 4 32% in Q1.

Operator

With solid operating results and stable contribution from capitalized model, our leverage ratio, which is defined as risk bearing loan balance divided by shareholders' equity was again at a historical low of 3.3 times in Q2 compared to 4 times in a year ago. We expect to see leverage ratio fluctuated around this best level in the near future. We generated approximately $1,800,000,000 cash from operations in Q2, roughly flat Q on Q. Total cash and cash equivalent was $8,500,000,000 in Q2 compared to $9,000,000,000 in Q1. Non restricted cash was approximately $5,300,000,000 in Q2 compared to $5,100,000,000 in Q1.

Operator

The sequential decline in cash position was mainly due to increased cash usage in our balance sheet lending. As we discussed earlier, we will continue to look for opportunities to deploy resources to launch new initiatives, develop new technology and expand service offerings. Non GAAP net profit was 1,147,000,000 in Q2 compared to $976,000,000 in Q1. 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 Q1's earnings call, we announced to increase our dividend payout ratio to 20% to 30% and switch to a semiannual dividend distribution schedule.

Operator

Today, we are glad to declare a semiannual dividend of $0.25 per ordinary share or $0.50 per ADS in U. S. Dollar books, which represent approximately 30% of the payout ratio. Also in June 20, 2023, We announced a share buyback plan to repurchase up to $115,000,000 over 12 months period. As of August 18, 2023, we have already bought approximately US28 million dollars Words of our ADS in open market at an average price of 18.03 We will continue to execute the buyback program in accordance with the relative rules and the regulations.

Operator

With the full execution Going forward, we will continue to optimize our capital allocation plan and make timely adjustments to generate higher returns to our shareholders. Finally, regarding our outlook. While we see accelerated year on year growth In low volume in Q2, which is in part driven by easy comp, we do notice continued uncertainty in macro economy. At this junction, we still see a slow recovery in consumer credit with the growth rate somewhat depending on macro conditions for the rest of the year. As such, we would like to adjust our full year total loan volume target for 2023 to between RMB470 1,000,000,000 and RMB485 1,000,000,000, representing a year on year growth of 14% to 18%.

Operator

As always, this forecast reflects the company's current and the preliminary view, which is subject to material changes. With that, I would like to conclude our prepared remarks. Operator, we're now open to take some questions.

Speaker 1

Thank you. Followed by English translations. First question comes from the line of Alex Ye from UBS. Please go ahead.

Speaker 3

So my question is, so there appears to be some dislocation between the strong volume growth and the less strong revenue growth In the past 2 quarters, so is it mainly due to the higher repayment issue or there is some product mix change that lead to such changes. So how should we expect the revenue take rate trend going forward? Thank you.

Operator

Sure. I think I will take this one, Alex. And you're probably right. Basically, the reason that The loan balance growth as well as the revenue growth slower than the loan volume growth is mainly because of the duration of the loans And so far this year are shortening, which in part is because of the issue we encountered in the Q1 of the early repayment. If you recall, during the Q1, there was a pretty significant impact on the revenue stream because of early repayments.

Operator

Even though the Q2, we saw that the early payment sort of peaked around the April timeframe and then start to gradually, although marginally trending Kind of to the right direction for us, but still compared to sort of historical average, we're still seeing a shorter Kind of duration of the loan book, that shorter duration will definitely result in a kind of a Slower accumulation of the loan balance and also the slower or kind of a slower growth in revenue relative to the loan volume. We are from I guess from product mix perspective, they didn't have too much significant Kind of directional impact, say, we're taking in a bunch of new products that happened to be shorter duration. No, I don't think that's a significant factor. And it's more so has to do with the issue I mentioned earlier. Then going forward, we are ever since the Q2, we are taking some Kind of measures to gradually kind of move the duration or move the tenant of the loans to a longer period.

Operator

As I mentioned, since May from May to July, We see a gradual kind of improvement so far. And for the second half, We'll continue to take some actions to manage the duration and hopefully the second half the revenue take rate You will see a little bit improvement or increase compared to what you saw in the first half.

Speaker 3

Okay. Thank you very much.

Operator

Thank you. Thank you

Speaker 1

for the questions. One moment for the next question. Next question comes from the line of Frank Zheng from Credit Suisse. Please go ahead.

Speaker 4

Thank you, management, for giving me the opportunity to ask questions. This is Frank from Credit Suisse. The first question is based on the latest macro environment and credit risk performance of the portfolio, Do we foresee any extra provision we need to take? Or is there any more room for extra write back going forward, especially considering the provision coverage ratio recorded another step up to over 500% this quarter. And the second question is a follow-up Of the previous question, can could the management give us more specifics on measures taken to improve the duration of loans?

Speaker 4

And I just want to just curious that in the current macro environment, are we preferring longer duration or shorter duration? Thank you.

Operator

Okay. I think I will take the first part and then I'll let our CRO, Mr. Zheng, answer the second part. So in terms of provisions, as you know, we have been on a very consistent policy to book our provisions conservatively and make sure that all the provisions are more than enough to cover the potential risks Yes. And if you look at the historical kind of financial report of us, basically other than the very Special quarter, 1 or 2 quarters for the majority of the period, we have the write backs from the previous provisions.

Operator

As I mentioned in my prepared remarks, I think the Right now, we see a relatively stable, although some fluctuation in the risk profile. So you should continue to see write backs in the coming quarters, although the size of the write back, we really can Determine at this point, it's up to multiple the 3rd party evaluation and Also all the other factors, but directionally you will continue to see write backs in the coming quarters. And we will In terms of continued booking additional provision, we will take more prudent approach based on what our observation of the macro environment. And if you feel necessary, we will book more provisions and to counter the potential risk. The provision coverage ratio you mentioned, the 5 11% versus last quarter's 430 something, That's not a metrics we have a target on.

Operator

It's more than a rather than it's a calculated number. So we booked provision and then when we do the calculation, it happened to be 5.11. And so That's not something indication that we're targeting a higher coverage ratio or something. No, it's more We built provision basically based on that quarter's loan volume and the 3rd party's evaluation. I will stop here and the second part of question will I will hand over to Mr.

Speaker 2

We believe loan duration is a combined result of contract retainer and early repayment. So first, I will talk about the early repayment. Early repayment was steadily declining, mainly due to the macro environment changes. And the second reason is our operational efforts. From a macro perspective, the early repayment sentiment was cooling off.

Speaker 2

We have observed that early repayment ratio for our historical loan portfolio has been decreasing for 4 consecutive months from April to July. And from operation perspective, we have refined our operation strategy to reduce the early repayment in 3 ways. The first is we applied a new telemarketing rules to incorporate the early repayment ratio into the KPI of the salesperson, So the salesperson tend to control this ratio. 2nd, we offer some benefits to retain the users when they have the intention for early repayments. 3, we reduced the 7 day interest free coupon to avoid those short term borrowers.

Speaker 2

Based on those optimizations, We have seen improvements in our early repayment situation. As for contract retainer, we won't say shorter the better or vice versa. We offer the tenure based on the user's profile. For example, for those who have stable income and higher creditworthiness, we tend to offer a longer tenure to lower their repayment pressure. But for those who have less long term visibility, we tend to reduce the risk exposure and shorten the tenure to control the risk.

Speaker 2

So different user profile and the ticket size will have different impact on the short term and the long term credit risk. We will further upgrade our self developed GBST model, the gradient survival tree model to improve the fitness of long tenure and balance the profitability and risks. In conclusion, under current macro conditions and our proactive management, we expect the early repayment ratio will further decline and our effective loan duration will increase in Q3.

Speaker 1

Thank you for the questions. We'll move on to the next question from the line of Emma Xu from Bank of America Securities. Please go ahead.

Speaker 5

So I have two questions. The first one is about the loan demand in Q3. We see the short term consumption household consumption loan declined 42,000,000,000 in July and it seems the consumption recovery remained lackluster. So how what's your loan What do you see loan demand at your side? And the second question is about loan pricing.

Speaker 5

So will the lackluster loan demand impact your loan pricing? And with the LPR being cut For TWICE since June, do you also need to adjust down your loan pricing? Thank you.

Speaker 2

Thanks, Emma. I will answer your question. We also noticed that the Citizens' short term loan has decreased in in July. But from our perspective, our loan balance continued to increase in July August, unlike the declining trend of From demand perspective, since the beginning of this year, We have seen some structural changes in terms of users' demand. From user quality perspective, the highest quality users tend to And from the usage perspective, the broader broadly defined SME Users are more active than the consumer credit users, especially for those in the construction, transportation, tourism, Hotel and Catering Industries, plus our operational efforts, we have gained efficiency improvement Given the softer consumer credit demand, We expect to increase our spending on the broadly defined SME users.

Speaker 2

We will increase our Further, we will increase our penetration in the broadly defined customer segments in new user acquisition. And for the existing users, we'll improve our service qualities to improve the users' stickiness. In terms of the pricing, we expect the pricing will be stable in the future. From our past experience, The LPR rise or cuts had very little impact on our pricing. Our pricing is mainly determined by the supply and demand in this market.

Speaker 1

Thank you for the questions. One moment for the next question. Next question is from the line of Yada Li from CICC. Please go ahead.

Speaker 6

Hello, management. Thanks for taking my question. This is Yada with CICC. And today, I just have one quick question. I was wondering, could you please elaborate more about the consideration behind the $150,000,000 share purchase program this time and should we consider it as a regular way to return value to the shareholders?

Speaker 6

Thank you.

Operator

Okay. Yada, thanks for your question. Basically, every quarter, we are Reviewing our cash position as well as our capital allocation kind of a strategy. And when we determine that there are actual we consider the free cash Sitting there idle without making too much of a return, then We would like to deploy that cash either in the form of the dividends or in the form of the buyback, Okay. So that's a it's, I would say, ongoing process in the future quarters as well.

Operator

And we consider an optimal balance between the buyback and Dividends is the best way to return to the shareholders. So like I said, the first thing first, we need to complete this US150 $1,000,000 buyback program And along the way, we will do our pre article review to determine what to do afterwards There, but longer term, I would say some kind of a combination between the buyback and the diligence. Thank you.

Speaker 1

Thank you for the questions. In the interest of time, I'll now conclude the Q and A session. I would like to hand the call back to management for

Speaker 3

Closing remarks.

Operator

Okay. Thanks for everyone joining the conference. Yes, since we have our peers right behind us in their earnings call, so to the courtesy, we just conclude our call here. If you have additional question, Please contact us offline. Thank you.

Speaker 1

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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