LexinFintech Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 29, 2023

There are 7 speakers on the call.

Operator

Hello, and welcome to the Lushin Fintech Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. It is now my pleasure to introduce IR Director, Mindy Dong.

Speaker 1

Thank you. Hello, everyone. Welcome to Lexin's Q2 2023 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are our CEO, Jay Xiao President, Jared Wu and CFO, James Zheng.

Speaker 1

Before we get started, I'd like you to remind you of our safe harbor statement in our earnings press release, which also applies to this call. During the call, we may refer to business outlook and forward looking statements, which are based on our current plans, estimates and projections. The actual results may differ materially, and we undertake no obligation to update any forward looking statements. Thus, unless otherwise stated, all figures mentioned are in RMB. Jay will first provide an update on our overall performance.

Speaker 1

James will cover the financial results in more details. And lastly, Jared will then discuss risk management. I will now turn the call over to Jay. His remarks will be in Chinese and the English translation will follow. Hello, everyone.

Speaker 1

It's my pleasure to share with you our performance for the Q2 of 2023. In the current macroeconomic environment, we have achieved another strong quarterly results by adopting a prudent business approach. Loan volumes for the Q2 was RMB63.9 billion, up 30% year over year, once again exceeding the high end of our guidance. Loan balance reached RMB114.1 billion, up 32% year over year. Revenue was RMB3.1 billion, up 27% year over year.

Speaker 1

Net profit was RMB356 1,000,000, up 112% year over year. In the Q2, we adhered to the 2 main focuses of risk and data, pushed forward more refined operations, iteratively upgraded user risk identification system and improved the quality of new assets. The e commerce business grew rapidly and the synergies with the main consumer finance business got further enhanced. We have achieved solid business growth for the 5 consecutive quarters with profitability and cash flow improving significantly. In addition, we attached great importance to compliance capability building and successfully completed the stage by stage credit reform, which was to disconnect with financial institutions in Chinese, as scheduled in accordance with the June 30, NDA compliance requirements.

Speaker 1

There were three highlights of the 2nd quarter results. First, we further refined operations to optimize asset structure and increase the proportion of high quality customer segments. In the Q2, we continued to iterate and hone our models to strengthen our risk identification capabilities and improve the accuracy of user identification. In terms of existing customer operations, thanks to our improving capabilities, marketing efficiency reached a higher level. In the second quarter, Marketing efficiency increased by 16%, while telemarketing causes decreased by 39% sequentially.

Speaker 1

In terms of the operation of settled users, the order rate of the reapproved user in the same month increased from 40% to 90%, 90% and day 1 delinquency rate decreased by 20%, which manifested our notable operation improvement. In terms of new customer operations, the number of new active users increased by 14.9% in the 2nd quarter compared to Q1, while customer acquisition cost remained basically flattish. Continued refinement of operations also brought us a steadily improvement in asset quality. The proportion of new loans contributed by high quality users rose to 92% from 80, 8 0 in the Q2 of last year, while the day 1 delinquency rate in the 2nd quarter fell by nearly 10% on a quarter over quarter sequential basis. Although the asset quality of existing loans fluctuated slightly due to a specific industry event and the macro environment, We believe overall asset quality will continue to improve as we acquire more and more high quality users.

Speaker 1

Secondly, we saw the rapid growth of our e commerce business and further enhanced synergies among different business segments in our Luexin consumption ecosystem. In the second quarter, the e commerce business achieved a transaction volume of RMB1.49 billion, up 31.6 percent Q on Q and 34.5% year over year, exceeding the 10.7% year over year growth rate of total retail sales of consumer goods. And the e commerce business achieved a 44 year over year growth rate of transaction volume during the June 18th shopping festival period. The number of users also grew substantially. In the Q2, the number of active user in the e commerce business grew 24.2% Q on Q and 36.4% year over year.

Speaker 1

The e commerce business has been focusing on high quality and high growth young consumer groups who fancy new trendy goodies. Therefore, we continued to introduce high quality merchants such as fashion sports and international like luxury brands that are more suitable for installment consumption. With more merchants and product categories introduced on our e commerce platform, a large number of existing users have been revitalized, resulting in the synergy between e commerce and consumer finance business. During the June 18th shopping festival period, the significant growth in the e commerce consumer traffic led to a rise in the number of quality active users in the consumer finance business with an increase of approximately 4% in June compared to April. At the same time, the active user in consumer finance business have further stimulated the e commerce consumption, resulting in a mutually reinforced loop in the business ecosystem.

Speaker 1

We have seen further reinforced synergies between e commerce platform and consumer finance in terms of acquiring new customers and boosting existing users' activities. Attributing to our unique Lexin consumption ecosystem, In July, we won the award of best digital customer ecosystem initiative in China by the industry renowned Asian bankers. Thirdly, we have successfully delivered 5 consecutive quarters of solid business growth and strong cash flow. In the Q2, our net margin rose to 11.6%, a 4.7 percentage increase on a year over year basis. Cash flow remained strong and increased by 30.2 compared to the year end of fiscal year 2022.

Speaker 1

We have always taken a firm stance to implement a 2 wheel drive strategy of risk and data, which essentially fueled the turnaround of our business since the neither in the Q2 of 2022. The Q2 in 2023 is the 5th growing quarter in a row and we expect the momentum to continue. Taking the above mentioned into consideration, the Board approved and decided to distribute recurring cash dividends, aiming to improve return to our shareholders and express our full confidence in the business prospects in the long run. Starting from the 2nd fiscal quarter of 2023, we will distribute a recurring cash dividend semiannually at an amount equivalent to approximately 15.15 percent to 30.30 percent of the company's net profit in the previous 6 months period or as otherwise authorized by the Board. In Q3, we will distribute a dividend of US0.058 dollars per ordinary share or US0.11.6 dollars per ADS for the 6 month period ended June 30, 2023, representing approximately 20% to 0% of net profit for the period of the first half twenty twenty three.

Speaker 1

It is our continuous implementation of a 2 wheel drive strategy that effectively bolstered the steady growth of our business. On the front of technology investment, in Q2, research and development expenses reached RMB120 1,000,000, maintaining the industry level. It's worth noting that we accelerated the development of the use case of AI large language models in finance sector. This model has been incorporated into our chat robots that are used in the daily operation of telecell, customer service and operation inspection. Thanks to the application, we saw ongoing improvements in our operational efficiency and refined user experience.

Speaker 1

For example, in terms of customer service application, percentage of cases stopped without human intervention increased to 91.5%, which got 8.2% higher on a year over year basis. Regarding the use case in smart assistant service, in addition to coding assistant tools and initiative of design we talked about in last quarter, we further applied to data analysis, the design and optimization of risk management database, which boosted the analysis efficiency and the reduced employees' workload. Last but not least, let me give you an update on our progress in social responsibility. Since we launched small store supporting projects, focusing to facilitate the financing needs of SME, We have helped over 100,000 SME owners in over 300 cities and 30 provinces. In addition, on the front of customer protection, we work together with regulators, the police, lawyer and the industry association and the financial institutions.

Speaker 1

Our capability in terms of data security got further recognition from national level institutions such as the China Academy of Information and Communication Technology and the China Cybersecurity Industry Alliance. Looking ahead, in the face of the complex and uncertain macro environment, we will remain the prudent business approach, continuously push ahead strategies of risk management integrating and customer base upgrading and deliver higher quality growth. Next, I will pass to our CFO, Zhen, for financial updates.

Speaker 2

Thank you, Jay. I will now provide more details on our financial results. Please note that all numbers are in RMB unless otherwise stated. The Q2 marked our 5th consecutive quarter of rebound since we bottomed out from the 12th in Q1 of last year. We delivered another quarter of healthy growth, both in overall operating and financial numbers.

Speaker 2

This is not an easy achievement amidst the relatively mild Q2. Thanks to our continuous efforts on reconstructing risk management capabilities, upgrading to a better customer base, refining the operations and cost optimization initiatives. We believe we have planted the right seeds by undertaking the above mesh strategies and expect to reap more benefits of such improvements in the coming quarters. First, please let me elaborate at a high level on what happened in this quarter as compared with the same quarter of 2022. Total loan originations for the quarter reached RMB 63,900,000,000, an increase of 30.1 percent year over year, beating the high end of Q2 guidance we gave earlier.

Speaker 2

Revenue grew by 26.6 percent year over year to reach around RMB3.1 billion for the quarter, which was mainly driven by the GMV growth and the increased loan balance, which reached $114,000,000,000 As a result of our customer base upgrading, better quality customers usually generate larger ticket size loads, hence contributing the GMV growth. The strong revenue growth was achieved despite the fact that the weighted average APR fell below 24% in Q2, around 1% point lower than a year ago. Loans with APR under 24% now made up over 86% of all loans, more than 5% higher than 1 year ago. Another contributing factor was the funding cost, which stood at 6.6% during this quarter, a decrease from 7.2% a year ago, As the cooperations with new funding partner banks continue to roll out, we expect lower funding costs in the coming quarters. In addition, the loan tenure was 14.7 months versus 12.8 months in Q2 last year, also contributing to the revenue growth.

Speaker 2

However, amidst the increased macro uncertainties, we have started to optimize the tenant structure earlier this year to reduce the potential exposures. We continue to sharpen our focus on iterating and refining risk management capabilities in the Q2, upholding risk management as our top business priority. Asset quality steadily trended better. For instance, day 1 delinquency rate got lower. We also further improved accuracy of credit profiling and risk management efficiency.

Speaker 2

Due to the short term turmoil in the post loan collection industry caused by some certain company specific incident, our 30 day plus delinquency rate and 90 day plus delinquency rate fluctuated a bit, but still better than 1 year ago, standing at 2.59% and 4.6 1%, respectively, versus 2.63% and 4.85%. In Q2, as we continue to push ahead cost efficiency initiatives, total operating related costs and expenses, including processing and servicing costs, sales and marketing, R and D and G and A as a percentage of average loan balance dropped notably to 1.01% versus 1.43% in Q2 of last year, indicating a 42 basis point of cost reduction. On a going forward basis, we are fully committed to continue the cost optimization initiatives as one of the long term strategies. As a result of the aforementioned, we're able to report a net income of RMB356 1,000,000, an increase of 112% year over year. The net margin improved to 11.6% versus 6.9% in Q2 last year.

Speaker 2

We have seen substantial improvements in operational efficiency and profitability compared to 1 year ago, which clearly serves as a strong testament of our ability to sustain the V shaped rebound. Apart from the above year over year analysis, I would also like to share some perspectives through our quarterly comparisons. In Q2, RMB 63,900,000,000, an increase of 4.9 percent quarter over quarter as we maintained a prudent growth approach considering the wary consumer spending. It's worth mentioning that we fully leveraged our Lexin consumption ecosystem and well captured the growth opportunity during the June 18th shopping festival. As a result, we were able to deliver a faster than expected 31.6 percent quarter over quarter GMV growth on e commerce platform.

Speaker 2

We also expanded product offerings and introduced more high margin SKUs in order to boost the gross profit of e commerce business line. Consumer Finance take rate fell slightly to 2.3% from 2.5% of last quarter. The slight fluctuation in take rate is a combined results of the lowered APR, which stood at 23.6% versus 24.4% in Q1 and more bookings of provisions due to the overall market uncertainty and the shortened tenure. The tenure is now at 14.7 months versus 15.1 months of the previous quarter. Consequently, the total operating revenue for Q2 booked an increase of 2.4% quarter over quarter, among which revenue from tech empowerment service registered a 6.5% increase quarter over quarter and revenue from the installment e commerce recorded an increase of 5.5% quarter over quarter.

Speaker 2

The e commerce revenue growth was lower than GMV growth due to the increased platform service or POP business instead of the company directly sourcing and selling the merchandising. Therefore, more revenue is booked on the net basis. Overall operating expenses stayed almost flat despite 3% growth in sales and marketing related costs driven by the user growth. Offsetting the sales and marketing cost increase is the decrease in G and A and R and D expense due to efficiencies. Therefore, we achieved a sequential growth in net income of 8.6% and further enhanced the net margin to 11.6% from 11% in the last quarter.

Speaker 2

To conclude, we have registered a strong improvement during the Q2 from both year over year and quarter over quarter perspective. This solid result was achieved under the current macro uncertainties and slowing economic recoveries. At the end of Q2, the company had cash position of around $5,500,000,000 on hand and net equity position of $9,400,000,000 In view of the healthy cash flow situation, the Board approved the semiannual dividend plan. The cash flow from operations is improving and robust to sustain future growth, thanks to increasing profitability, more efficient guaranteed deposit required for the loan facilitation business. This also demonstrates our confidence in the overall business to continuously produce shareholder returns.

Speaker 2

Finally, I would like to update our outlook for the second half of twenty twenty three. Based on the company's preliminary assessment of the current market conditions and the macro situation, the company reaffirms the early of the year guidance of annual GMV amount of RMB245,000,000,000 to RMB 255,000,000,000, which represents a 20% to 25% year over year growth. Therefore, for the second half of the year, we're expecting the high single digit to mid teens percentage growth year over year. These estimates reflect the company's current expectation, which is subject to change. In Q2 results represented the 5th consecutive quarter of continued rebounding, both in operating metrics and the financials.

Speaker 2

It further solidifies our commitment to continue the turnaround journey despite possible headwinds from the macro uncertainties. With that, I would like to turn the call over to our President, Jared Wu, who will discuss our risk management. Jerry, please go ahead.

Speaker 1

In the Q2, we continued to promote our strategies of focusing on risk management and upgrading customer growth and achieved notable results in several aspects. The overall day 1 delinquency rate continues to drop down nearly 10% compared to Q1. The 30 days 90 days delinquency rate were effectively stabilized within a manageable range. In terms of data mining and model iteration, we continued to increase the utilization of PBOC's data, 3rd party data and internal data from our Luexin consumption ecosystem and upgraded the model matrix of each business line. As a result, we managed to improve the accuracy of identifying user risk levels and the credit needs.

Speaker 1

On the front of IT infrastructures, we successfully developed a simulation system for operational decision making empowered by AI technology. The system can generate operation decisions for monthly order within 1 minute with over 95% accuracy, which essentially bolstered our business decision making through big data and AI models. To pursue and optimize the balance between risk and return, we started to adjust our tenor structure of overall portfolios and the generation plan for loan tenure loans. Thus, the average tenure of new loans steadily declined and we expect it to trend shorter in Q3. In the aspect of post loan collection operations, due to the turmoil in the loan collection industry and the impact from anti collection criminal groups, our asset quality metrics related to post loan performance got impacted to some extent.

Speaker 1

Thanks to our prompt carrying out of countermeasures, the impact is gradually fading out. We have continuously honed our fundamental management capabilities this year. Therefore, we effectively improved our capability in credit profile identification and efficiency in risk management. As a whole, we are seeing essential progress in risk management capabilities and a steady improving trend in asset quality. We remain in full confidence that every endeavor we make today will certainly bear more fruits in the coming quarters and lead to our qualitative leap forward on the front of risk management and asset quality.

Speaker 1

This concluded our prepared remarks. Operator, we can now open the floor for questions.

Operator

Thank you. And our first question comes from the line of Frank Zhang with Credit

Speaker 3

Suisse.

Speaker 4

Thank you, management, for giving me the opportunity to ask questions. I have two questions. The first one is on the outlook for various operating metrics in the Q3 as well as in the second half. How is the credit demand in July August in view of the macro headwind? And the second question is on asset quality.

Speaker 4

As mentioned previously, due to the change in loan collection industry, there is some fluctuation in asset quality. What's the impact so far? And also, can management share more update on future outlook or asset quality? Thank you very much.

Speaker 2

I'd like to add a little bit more. Basically, in view of the uncertainties in the macro situation, we're going to stick to our original early of the year guidance of GMV245 1,000,000,000 to GMV255 1,000,000,000 growth. That represents 20% to 25% year over year growth. As a matter of fact, while we have completed the first half of the year already, if you look at the numbers, we have achieved 35% year over year growth up to this point. So that means if we look at the whole year of 20% to 25%, for the second half, we'll be looking at basically a GMV growth of high single digit to probably mid teens growth in terms of GMV.

Speaker 2

And really, this is because we are adopting a very prudent kind of approach in terms of the business growth. We would like to kind of more overlooking at the stabilized the overall scale, the overall GMV growth, but really put the risk management and also the net income, the overall profitability as the first priority when we go with our operations for the second half.

Speaker 5

Okay. So Frank, I'll answer the translation for Jay. For your first question, we do still like Jim said, we expect the full year guidance to maintain within the range of RMB245,000,000,000 to RMB255,000,000,000. And I think this year as of right now the macro recovery is not too optimistic as we were hoping to or expecting earlier this year. And we're actually consciously controlling our increasing pace.

Speaker 5

And right now, depending on the macro environment, right now, we're taking a more prudent business approach. We're focusing more on profitability as our priority. And for the second half, the increasing pace of our business expansion really depends on the impact of recovery conditions. And for the company's from the company's operational level, the demand growth in July August is more or less similar to the Q2 and we don't see a very strong recovery trend. So the Q3 will be more on rhythm of growth, again, focusing more on profitability and it will remain more or less stable.

Speaker 5

In terms of your second question, as I mentioned before, with the macro economy being down a little, it did put some pressure on our asset quality. In the second quarter, with the known industry impact from the certain collection issues having with the certain collection companies, we did bear some burden. It did impact our collection rate or our 30 day collection rate. But we are having putting on more efforts improving on our new assets, asset quality. As we mentioned earlier in our script, the overall asset quality for our new assets are actually improving and then it in turn reflected on a lower surde collection rate.

Speaker 5

And it kind of evened out the overall data. In the future with the macro not being in the recovery we were kind of hoping to, there will still be some challenge on our risk level. But we're confident as we input or taking in more good quality new assets, the overall asset quality will get better. I hope that answered your question, Frank.

Operator

And our next question comes from the line of Alex Ye with UBS.

Speaker 3

So my first question is on the e commerce business line. So management has mentioned in the remarks that the business line has grown rapidly in Q2. Can you elaborate a bit more on the drivers and your future plans on this business? 2nd, there is some mentioning about the e commerce business line being a part of the eulosine ecosystem. Could you can also get some color on the update on license consumption ecosystem as a whole?

Speaker 3

Thank you.

Speaker 5

So, we've been focusing on high quality and potential users. And for the last quarter, we have we continue to expand our categories and introduce high quality merchants as well as increasing our categories to fit better to our targeted audience. And also we've been leveraging on the 618 e commerce shopping festivals and we've increased our operational efforts and our promotional range that which resulted in a very remarkable result. And a more fundamental reason is that we actually rooted actually today we're rooted in the consumer genes of the Lixin Group. We have created a consumer ecosystem that center around good quality, high potential users and the synergies between e commerce and business and our consumer finances have been further strengthened.

Speaker 5

And they mutually encourage each other. And specifically, our e commerce platform actually helps us when it comes to customer acquisition as well as revitalizing the already settled customers that creating such synergies between 2 platforms and business. So Lexin started from the installment e commerce business. We've gradually built up Lexin's multi segment consumer ecosystem, which includes consumer finance as the main business accompanied by the installment e commerce business, Pukui offline customer acquisition finance business, the SaaS business for financial for providing services to financial institutions and innovative business, which is a multi business line and an all around ecosystem of providing credit services to customers. And as we just introduced prior, the progress of our e commerce business in the Q2, our SaaS business for financial institutions and our Puhui offline team business are developing steadily as expected and according to our plan.

Speaker 5

And we believe that we will have a more scalable and more notable business, more significant results to actually share with you in the future. Hope that answers your question, Alex.

Speaker 3

Sure. Thank you.

Operator

Thank you. One moment please for our next question. Your next question comes from the line of Yada Lee with CICC.

Speaker 6

Then I will do the translation.

Speaker 2

Okay. Hello,

Speaker 6

management. Thank you for taking my question. My question is about can the management elaborate more about the reasons on approving the dividend policy under current circumstances And are there potential impacts on the company cash flow? That's all. Thank you.

Speaker 2

Okay. I'll take this question. In view of the macroeconomic uncertainties, obviously, we're maintaining a very prudent approach in terms of business growth. So we are basically trying to look at more stabilize stabilizing the overall kind of a scale, but really put the focus on risk management and profit. So basically, if you put more focus on risk management and profit, this will actually generate more profit.

Speaker 2

So we continue to see the growth in profit opportunities. Plus, we continue to take cost optimization initiatives as one of our long term initiatives. This will also lead to higher profitability down the road. So basically, the cash flow from operation is sufficient and robust to support future business expansion. And as we announced earlier of the year, we also have kind of restructured our original convertible bond with PAG.

Speaker 2

So the payment to the PAG actually is not issue for us anymore. As a matter of fact, we have paid half of the original convertible bond amount. So it's cash is sufficient. And we feel that dividend really is a more direct and tangible way to reward the shareholders at this time. So that's why the Board has approved our plan to start giving out the dividend on a semi annual basis in the range of 15% to 30% of the net income as a recurring policy.

Speaker 2

So really this underscores the overall management's confidence in the operations of the business. So hopefully this answers your question, Dada.

Speaker 6

Thank you very much.

Operator

Thank you. I'll now hand the call back for any closing remarks.

Speaker 1

Okay. Thank you, everyone, again for joining us today. If you have further questions, please contact us via our contact information available on our IR website. Thank you, everyone.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

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Key Takeaways

  • The company reported 30% year-over-year loan origination growth to RMB63.9 billion, revenue up 27% to RMB3.1 billion, and net profit rising 112% to RMB356 million, marking its fifth straight quarter of growth.
  • Lexin enhanced its risk management and data-driven operations, boosting marketing efficiency by 16%, cutting telemarketing costs 39%, and improving asset quality with high-quality users accounting for 92% of new loans and day-1 delinquency down nearly 10%.
  • The e-commerce business achieved RMB1.49 billion in GMV, up 31.6% quarter-over-quarter and 34.5% year-over-year, while active users grew over 36%, driving a mutually reinforcing loop with the consumer finance platform.
  • Profitability and cost control strengthened with a net margin of 11.6% (vs. 6.9% last year), operating expenses to average loan balance falling 42 basis points to 1.01%, and operating cash flow up 30.2% since year-end 2022.
  • The board approved a semiannual cash dividend policy distributing 15–30% of net profit, with a Q3 dividend of $0.058 per share (~20% of H1 net income) to reward shareholders and reflect confidence in long-term prospects.
A.I. generated. May contain errors.
Earnings Conference Call
LexinFintech Q2 2023
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