FinVolution Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, hello and thank you for participating in the Q1 2024 Earnings Conference Call for Finvolutions Group. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Jimmy Tan, Head of Investor Relations for the company.

Operator

Jimmy, please go ahead.

Speaker 1

Hello, everyone, and welcome to our Q1 2024 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company e mail alerts by visiting the IR section of our website at ir. Bnbgroup.com. Mr.

Speaker 1

Thierryng Li, our Chief Executive Officer and Mr. Dia Yuan Xu, our Chief Financial Officer will start the call with their prepared remarks and conclude with a Q and A session. During this call we will be referring to several non GAAP financial measures to review and assess our operating performance. 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.

Speaker 1

GAAP. For information about these non GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. Before we continue, please note that today's conference will contain forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995.

Speaker 1

Forward looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company's filings with the U. S. Securities and Exchange Commission.

Speaker 1

The company does not assume any obligation to update any forward looking statements except as required under applicable law. Finally, we posted a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Tianjin Li. Please go ahead, sir.

Speaker 2

Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. This is Tianjin Li, CEO of Vimp Solutions Group. We are happy to speak with you today. We kicked off 2024 with continued strong execution of our local focus, global outlook strategy, in line with the domestic and international macro trends.

Speaker 2

China's economic recovery is progressing gradually, while Indonesia and the Philippines are growing more vigorously. There has been a pickup in economic and consumption activities during China's recent holidays, but the M1 financial data in April turned negative year over year, sending mixed signals to the market. Bearing such situation in mind, we will continue to closely monitor the macro environment while leveraging on our technologies to increase the efficiency of our operations. Driven by our local focus global outlook strategy, we have served around 31,000,000 borrowers across China, Indonesia and the Philippines as of the end of the Q1 of 2024. Our Q1's performance highlights our strategy's effectiveness as well as its flexibility.

Speaker 2

Transaction volume in China reached RMB46 1,000,000,000, up 10% year over year, while outstanding loan balance increased RMB64 1,000,000,000 up 4.4% year over year. Notably, our ongoing investment in information feed advertising drove further expansion in the number of new borrowers in the China market, up 3% year over year accounting for 20% of unique borrowers. Transaction volume from new borrowers contributed around 15% of total transaction volume, reflecting potential for our continued progressive growth into the China market. Meanwhile, we leveraged our leading technologies, strategic agility and deep experience to overcome various challenges facing our Indonesia operations since last quarter and delivered solid growth in our international markets. International transaction volume reached RMB2.21 billion, up 41% year over year, while outstanding loan balance expanded to RMB1.27 billion, up 34% year over year demonstrating our ability to capture opportunities in different countries.

Speaker 2

Driven by our effective social media strategy, the number of our new borrowers in international market increased by 13% year over year and represented 41% of unique borrowers. International business stands as our 2nd growth driver and its revenue contribution has been increasing steadily. For the Q1, revenue from international business reached RMB595 1,000,000, up 33% from the same period last year and representing 19% of total revenue. Going forward, we believe this segment's contribution to revenue will continue to increase as we strengthen our existing markets and expanded into new territories. We also continue to make and drive progress on the technology front in the Q1 of 2024.

Speaker 2

In February, our extensive collaboration with leading global academic institutions produced 3 papers, which were selected for the 30th Annual AAAI Conference on Artificial Intelligence, one of the world's top artificial intelligence conferences with an acceptance rate of just 24%. Through our ongoing investment in large language models, we have self developed a proprietary technology called Xcoder. It increases our programmers' efficiency through auto software bug detection and auto revision of frequently used codes, which greatly reduced human error. We have also utilized AIGC to streamline advertising costs and increase efficiency, producing more than 20% of video content with AI for vivid and precise advertising that resonates with our target borrowers while reducing market costs. On a related note, we leveraged our advertising, social media influence and video content to expand our brand awareness in our international markets on popular channels such as Facebook, TikTok and Instagram.

Speaker 2

Our followers reached 1,100,000,855,000 and 234,000 on those sites respectively. During the Q1 of 2024 up 87%, 55% and 10% respectively year over year. Before I will wrap up, a brief update on our ESG efforts. In line with our co commitment to financial inclusion, we continue to support the backbone of the economy by facilitating loans for small business owners during the Q1, both during the gradual and sometimes fragile recovery. We facilitated a total of RMB13 1,000,000,000 of loans for small business owners, up 26% year over year.

Speaker 2

Furthermore, we made additional strides with our public welfare program aimed at improving farmers livelihood through the life stream of agriculture products. Created in collaboration with China's nation of weightlifting team. This initiative has attracted over 2,000,000 viewers and increased farmers' incomes with more than 2,000 online transactions. In summary, we made most of the first quarter's positive through leveraging on our technologies and increasing efficiency. Firm execution of our local focus, global outlook strategy, ongoing tech innovation and deep dedication to our vision of financial inclusion propelled our steady progress and long term sustainable growth.

Speaker 2

We will remain committed to fostering inclusion, accessibility and technology as we create value for stakeholders and deliver better financial services to borrowers throughout the Pan Asian region. With that, I will now turn the call to our CFO, Jiaoyuan Xu, who will discuss our operational and financial results.

Speaker 3

Thank you, Li, and hello, everyone. Welcome to our Q1 2024 earnings call. Let's go through our key results for the Q1. To be mindful of the length of our earnings call today, I encourage listeners to refer to our Q1 earnings press release for further details. As Li mentioned, China's recent macro data coupled with economic activities during the holidays reflect China's slower than expected economic recovery with a few bright spots that are outpacing the overall trend.

Speaker 3

China's GDP expanded by 5.3% in the Q1 compared to the same period last year and by 1.6% compared to the previous quarter. In March, China's manufacturing activity expanded for the first time in 6 months with the manufacturing PMI reaching 15.8 points, up 1.7 points month over month. Non manufacturing PMI rose to 53 points boosting composite PMI to 52 point 7 points, up 1.6 and 1.8 points month over month respectively. All three index are within the expansion range indicating an acceleration in enterprise production and operational activities. The Consumer Competence Index improved to reach 89.84 points in March, but still hovering at relatively low levels.

Speaker 3

As Lee mentioned, transaction volume in the China market grew 10% year over year with an annual increase in the number of new borrowers, reflecting our commitment towards progressive growth in China's small market. Our average borrowing rate in the first quarter remained stable at IRR 22.3%, validating our commitment towards financial inclusion. Stabilizing our strong presence and reputation for reliability, we grew our cumulative number of funding partners to 102 institutions during the quarter. This broad base, coupled with China's recovery economy boosted our funding partners confidence in facilitating loans for better quality borrowers, improving our funding cost by an additional 50 bps on a quarterly basis. Looking forward, we are confident to achieving continuous optimization in our funding costs throughout the rest of the year.

Speaker 3

Furthermore, we have made great strides in our ABS insurance initiative, which will further diversify our funding source. Regarding risk, we expect our vintage delinquency to remain stable at 2.5% for the 4th quarter. Meanwhile, we drove an improvement in our recent April day 1 delinquency to 5.2% through a shift in our loan collection strategy. Loan collection recovery rate towards the end of the Q1 stood at a healthy range of 86%. Turning now to our international expansion.

Speaker 3

Our crucial second growth driver during the quarter, the cumulative number of borrowers for our international market exceeded RMB5 1,000,000, reflecting our commitment to promoting financial inclusion across all the market in which we operate. In our first international market Indonesia, the economy remains robust with GDP growth of over 5% in 2023 and the first increase to 5.1% in the Q1 of 2024. Driven by resilient domestic consumption and the increasing investment. Furthermore, Indonesia's PMI has consistently remained above 15 points for the past 2.5 years, indicating a strong position in the expansion zone. In March 2024 PMI increased by another 1.5 points to reach 54.2 points.

Speaker 3

Sales of motorcycles, a primary means of transportation in Indonesia, increased 4.5% month over month in March to 584,000 units. We are also glad to share that by leveraging our proven experience and technologies in the transition to better quality borrowers in the China market, our operation in Indonesia have largely overcome the recent challenges posted by interest rate adjustment. We will continue to actively monitor regulatory developments and accordingly. In the Philippines, our 2nd international market, the government has forecast a GDP growth rate of between 6% to 7% for full year 2024. As PMI index has remained in the expansion room 8 consecutive months and the unemployment rate remained low at 3.9% in March 2024.

Speaker 3

This further boosted consumption with growth in household consumption accelerating to 5.3% in the Q4 of 2023, up from 5% in the previous quarter. All these positive macro metrics support our strong growth momentum in the Philippines market. Overall, our performance in international markets remained solid for the Q1 of 2024. Transaction volume for the international markets grew 41% year over year to RMB2.21 billion, while outstanding loan balance grew 34% year over year to RMB1.27 billion. Number of unique borrowers in international markets were 849,000, up 15% year over year, while number of new borrowers reached 344,000, up 13% year over year.

Speaker 3

These results highlight borrowers' stickiness on our platform as well as our ability to acquire additional new borrowers through diversified channels with just the social media awareness. Notably, our Philippines operations continue to outperform expectations with transaction volume grow 194% year over year and 27% sequentially, contributing 25% of international transaction volume. This outstanding local performance has been widely recognized by regional financial institutions, attracting reputable local funding partners such as C Bank and the Union Bank. Notably, we have entered into a transitionary collaboration with Zeebanc to facilitate loans in both our overseas markets. Our credit facility from these two partners in the Philippines alone totaled nearly MXN650 1,000,000, greatly enhancing our presence in the country and facilitating our efforts to promote financial inclusion.

Speaker 3

Looking ahead, we are confident we will continue to attract reputable financial institutions to join us in the quest to advance financial inclusion in the country. As we strengthen our presence in the Philippines and gain greater recognition from local partners and the regulators, we believe our Philippines operation will assume a bigger role in our international business. Now turning to our financial metrics. Driven by strong execution of our local focus global outlook strategy, total net revenues for the Q1 grew to RMB3.17 billion, up 4% year over year. Our net income was RMB532 1,000,000 an increase of 1% quarter over quarter, reflecting our increased operating efficiency.

Speaker 3

Meanwhile, sales and marketing expense increased by 13 percent year over year to RMB449 1,000,000 as we continued to strengthen efforts to acquire new borrowers in both our China and international markets. Furthermore, leveraging our unparalleled industry expertise and their operational efficiency, we have achieved an above industry ROE of 3.2%. Our leverage ratio defined as risk bearing loans divided by shareholders' equity remained stable at 4 times, reflecting opportunities for growth when macroeconomy normalize. Our total liquidity position consisting of cash and cash equivalent plus short term investments reached RMB8.5 billion, up 10% from a year ago, reflecting a robust balance sheet that is well able to support our business growth, exploration of new opportunities and consistently return value to our shareholders. Finally, a brief update on our capital return program.

Speaker 3

As part of our commitment to continually return value to shareholders, we deployed over US27 million dollars in the Q1 of 2024 to repurchase our shares on the secondary market. Cumulatively, we have returned a total of US632 million dollars to our shareholders through our capital return program since 2018, demonstrating our consistent and sustainable commitment to our shareholders. The company reiterated its full year 2024 transaction volume guidance for the China market in the range of RMB195.7 billion to RMB205 1,000,000,000, representing year over year growth of around 5% to 10%. At the same time, the company expects its full year 2024 transaction volume for its international market to be in the range of RMB9.4 billion to RMB11 1,000,000,000, representing year over year growth of around 20% to 40%. That concludes my prepared remarks.

Speaker 3

We will now open the call to the questions. Operator, please continue.

Operator

Thank Your first question comes from Thomas Chong. Your first question comes from Yada Lee from CICC. Please go ahead.

Speaker 4

Then I will do the translation. Hello management, thanks for taking my questions. I have two questions today. And the first one is about the international branches. I was wondering how to view the regulation, market competition and profit outlook in different regions such as Indonesia and the Philippines going forward?

Speaker 4

Secondly, if we take the asset quality trend and the potential profit overseas into consideration, how to view the trend of take rate for this year and the future? That's all. Thank you.

Speaker 1

Okay. Hi Yada, this is Jimmy. Let me do the translation for you first. Okay. For the first question, let us do an overall recap on the international market situation.

Speaker 1

We have been doing our international market for 6 years and for the Philippine market we have been in operation for over 4 years. And in total we have over 10 years of experience in doing international operations. I would say that the international business has been growing very quickly with CAGR growth of over 100% in revenue for the past 3 years and revenue contribution from this segment has also reached 19% of total revenue with total registered users reaching 26,000,000 representing 14% at group level and the cumulative numbers of borrowers also exceeded 5,000,000 representing 17% group level. This international business is confirmed as the group's 2nd growth driver. And as you know, there has been a cap adjustment earlier this year on the borrowing rates.

Speaker 1

And after 5 months of business adjustment, we have optimized our borrowers' cohorts' models and data strategy to achieve stable operations. Our borrowers' cohort data our borrowers cohort quality increased in average ticket size and repeat borrowing rates are up 10% and 5.6% respectively. The conversion rate for higher quality borrowers increased with approved credit line increasing by 23% and most importantly our risk performance improved by 23% on a sequential basis. And the number our efforts has also been recognized by local financial institutions with the numbers of funding partners increasing to 6. And from customer acquisition perspective, we have seen small and mid sized platforms reducing the acquisitions and we managed to reduce our acquisition cost by 10%.

Speaker 1

And coming to take rate. After this round of adjustment, our take rate, we are confident to maintain around 10% in 2024 and this is similar to what we have in our tick rate before the pricing adjustment. And in 2024, we expect our Indonesian business to realize profits of over 10,000,000 of 1,000,000. Hello Yodal. Coming to our Philippines market growth in the Q1 has been rapid.

Speaker 1

Transaction volume in the Q1 reached RMB516 1,000,000 up 194% year over year and 27% sequentially representing 25% of total volume in the international market. The regulations in Philippines is relatively stable and our Q2 growth is expected to be in Superdigital as well. We have also attract reputable financial institutions such as Seabank and Union Bank to be our funding partners of over MXN615 1,000,000. And going forward, we are confident to continue our rapid momentum in the Philippines. Hello, Yada.

Speaker 1

Let me do the translation for this question as well. Although for the China market there has been some fluctuation in our release last year but the situation has been stabilized. And you can also see that we have a huge improvement in our funding cost of 50 bps in the Q1 and going forward in the Q2 we expect this trend to continue. And this is why our take rate has slightly improved from 2.9% in the previous quarter to 3% in the current quarter. And for our international market, the take rate has returned to a level of around 10% similar to what it has been prior to the price adjustment.

Operator

Thank you. Your next question comes from Thomas Chong from Jefferies. Please go ahead.

Speaker 1

Thanks management for taking my question. My question is about how technology can improve asset quality and operational efficiency. Thank you. Hi Thomas, let me do the translation for our CEO. Technology is the core of Evolution and we have remained consistent investment in technology throughout the year.

Speaker 1

Okay for example we have consistently invested in R and D since our establishment with a cumulative R and D investment of nearly R and D,000,000,000 since 2015. We have around 700 experts in R and D with 20% holding masters or doctor degrees. And additionally we have established long term academic collaborations relationship with 7 leading universities. And all these have our improvement in the aspect of operations and cost can be supported by our technologies. For example, in terms of customer acquisitions we have invested over DKK2 1,000,000,000 in our information feeds and through the accumulation of billions of user data and strategies involving over 100,000 percent of our video content is now generated by AI and this has reduced our video production cost about 60%.

Speaker 1

And cost wise we have also been deploying technology with our back end operations and thereby optimizing our internal operating efficiency. And in the Q1 alone our revenue achieved a year over year growth of 4%, while G and A expenses as a percentage of revenue optimized to 2.6%. And during the period of pre COVID to COVID, our G and A expenses as a percentage of revenue was 7.3%. And in terms of labor efficiency during the Q1 2024, average revenue per employee increased to 8.4% year over year. And these are the benefits that we have achieved through our tech investment.

Operator

Thank you. Your next question comes from Alex Yeh from UBS. Please go ahead.

Speaker 5

So I've noticed that in Q1 for our domestic business, we have seen the new customer lean borrower position, repeat borrowers and the conversion ratio for the domestic business has all appeared to have declined on a year on year basis. I'm wondering was that mainly driven by our tightened liquidity approval or mainly from weakened credit demand? And related to that, how to think about the outlook going forward? How has been the credit demand trend in April May? And was that an invitation for our full year target?

Speaker 5

Thank you.

Speaker 1

Hello Alex, this is Jimmy. Let me do the translation for Tim. Okay first of all let us recap the China macro economy and the micro credit industry that we are in. China economy presents a complex situation with GDP growth reaching 5.3% in the Q1 alone with a rebound in export and improvement in manufacturing PMI. However, do note that there was also a rare contraction in social financing and M1 along with a decrease in social retail sales and with consumer confidence.

Speaker 1

This is a rather mixed signal. And for the industry which we operate, we have also observed changes from the demand and risk end. Overall credit risk increased in the second half of twenty twenty three and remained relatively stable in the first quarter, but the recovery is still slightly below our expectation. And demand was relatively stable in the Q1 due to seasonal factors such as Chinese New Year but fluctuate when entering the Q2, validated by the mixed signals that we have seen earlier. And under this complex macro environment, Twin Pollution has implemented various strategies to counter this complex macro environment by enhancing our risk assessment model and tightening approval rates to ensure the overall stability of our risk metric.

Speaker 1

As Alexis has introduced earlier, our vintage delinquency has maintained stable at 2.5% with day 1 delinquency rate at 5.2%, while loan collection recovery rate was at 86%. And leveraging our dual wave effect of technology and operation efficiencies, we have seen a sequential decline of 50 bps in our funding cost and a year over year decline of 120 bps in our funding cost, while customer acquisition cost were optimized by 17% compared to the last quarter. And G and A expenses also decreased by 7% year over year. And all these measures enable us to achieve a stable take rate of 3%. Our consistent investment in customer acquisitions with in-depth focus on repeat customers has led to a stable business growth.

Speaker 1

For example, 30% of our borrowers have maintained on our platform for more than 3 years and over 80% of the loans were facilitated for repeat borrowers effectively elevating the pressure cost by fluctuating demand and tightening approval rate. And looking ahead in 2024, China economy has some challenges and also in our stabilization of risk, funding cost improvement and our enhancing on our efficiencies and focus on repeat borrowers. And with all these measures that we have implemented, we are still confident to maintain a healthy level of growth amidst challenging macro environment.

Operator

Thank you. Your next question comes from Hannah Han from Nomura. Please go ahead.

Speaker 6

Yes. Let me translate my question. Like the first question regarding the share repurchase program, could you give us more details on the current process? Also, does management have a new plan to further increase in the shareholder value? For the second question, we observed an increase in cash in 1Q.

Speaker 6

And could you provide more colors on future use of this cash? And additionally, how does the company plan to improve its operating efficiency? Thank you.

Speaker 1

Hello, Hannah. Let me do the translation. And for our share repurchase in the Q1 we have DKK27.2 million which increased by around 1 compared to last year and is 28% and represent around 28%. And we still have RMB93 1,000,000 for our buyback program in our quota. And we have also completed our share dividend distribution of DKK62 1,000,000 and coupled with our share repurchase of around DKK100 1,000,000 for the year of 2020, the total payout ratio was around 49% of net income.

Speaker 1

And for share repurchase and dividend, we have been doing it consistently for the last 6 years and have returned around SGD630 1,000,000 for our shareholders. And going forward we will continue to create long term value for our shareholders high quality growth and a leading capital return program through a combination of dividends and buyback. And now let me do the translation for Alexis. Okay. First of all, we need to ensure sufficient cash for the development of our business, especially our international business growth has been very rapid.

Speaker 1

Our Indonesia business after the TAP adjustment has maintained healthy take rates whereas Philippines is also growing at a very fast momentum. And in terms of local licenses, we have achieved significant progress in all our markets that we intend to have more local licenses and we will share more when there is more concrete information available. And coming back over the last 6 years, right, we have cumulative return DKK630 1,000,000 to our shareholders which is around half of our current market cap. And we are confident to maintain a healthy return to our shareholders while delivering high quality growth in our business.

Speaker 3

Okay. Thank you, Heather.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to management for closing remarks.

Speaker 1

Thank you once again for joining us on our conference call. If you have any further questions, please feel free to contact TIM Pollution Group Investor Relations team. Thank you everybody.

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Key Takeaways

  • China transaction volume in Q1 reached RMB46.1 billion (+10% yoy) with outstanding loan balance at RMB64.1 billion (+4.4% yoy) and new borrowers up 3%, while mixed macro signals (e.g. April M1 contraction) prompt ongoing monitoring.
  • International transaction volume rose 41% yoy to RMB2.21 billion and outstanding loan balance grew 34% yoy to RMB1.27 billion, with revenue from international business up 33% to RMB595 million (19% of total) and new borrowers up 13%.
  • Q1 net revenue was RMB3.17 billion (+4% yoy) and net income was RMB532 million (+1% qoq), while funding cost improved by 50 bps qoq and vintage and day-1 delinquency rates stayed at 2.5% and 5.2% respectively.
  • Ongoing tech initiatives produced three AAAI-accepted papers, a self-developed Xcoder tool for auto bug detection and AI-generated video content (>20% of ads), reducing production costs by about 60%.
  • Finvolution repurchased US$27 million of shares in Q1 (US$632 million since 2018) and facilitated RMB13 billion in small-business loans (+26% yoy), alongside an agricultural welfare program with over 2 million viewers.
A.I. generated. May contain errors.
Earnings Conference Call
FinVolution Group Q1 2024
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