PPDAI Group Q2 2024 Earnings Call Transcript

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August 20, 2024

Key Takeaways

  • International transaction volume soared 32% YoY to RMB4.5 billion while China grew 6% YoY, underscoring strong momentum in both domestic and overseas markets.
  • The company cut its funding cost by 90 bps in Q2 (114 bps in H1), raising its take-rate to ~3.1% and lowering 1-day delinquency to 5.1%, with vintage delinquency stable at 2.5%.
  • Net revenue reached RMB3.17 billion (↑3% YoY) and net income hit RMB551 million (↑4% QoQ), supported by a robust balance sheet with RMB8.1 billion in short-term liquidity.
  • Since its IPO, FinVolutions has repurchased US$337 million of ADS and launched a new US$115 million buyback program, alongside US$325 million in cumulative dividends, highlighting its capital return focus.
  • Management forecasts Indonesia operations will turn profitable in 2024 and Philippines operations in 2025, boosting confidence in sustained international expansion.
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Earnings Conference Call
PPDAI Group Q2 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for participating in the 2nd quarter 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.

Operator

I would now like to turn the call over to your host, Jimmy Pan, Head of Investor Relations for the company. Jimmy, please go ahead.

Speaker 1

Thank you, Alison. Hello, everyone, and welcome to our Q2 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.finvigroup.com. Mr.

Speaker 1

Tianjin Li, our Chief Executive Officer and Mr. Tian 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 discussion 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 US Securities and Exchange Commission. 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.

Speaker 1

I will now turn the call over to our CEO, Mr. Tianjin Li. Please go ahead, sir.

Speaker 2

Thanks, Jamie. Hello, everyone, and thank you for joining our earnings call. This is Tijun Li, CEO of Involusion Group. We are happy to speak with you today. We ended the first half of twenty twenty four on a positive note, driving progress growth in the China market while maintaining our rapid growth momentum internationally.

Speaker 2

So determine strong execution of our local excellence global outlook strategy or simply L E G O legal strategy. We made great strides across our business in the markets in which we operate. Cumulatively, we have served around 31,500,000 borrowers across China, Indonesia and the Philippines as of June 30, 2024. During the first half of twenty twenty four, transaction volume for the China market reached RMB92.5 billion, up 6% year over year. Transaction volume for international market continued to grow rapidly, soaring to RMB4.5 billion up 32% year over year.

Speaker 2

In terms of outstanding balance China reached RMB64.2 billion while our international markets rose to RMB1.4 billion, up 3% and 27% respectively year over year. This slide performance sent out advertisement to the effective execution of our legal strategy and the unwavering commitment of our team. Customers acquisition is a key element of our legal strategy. We view it as an ongoing investment that will ultimately lead to a higher percentage of better quality repeat borrowers and drive sustainable growth. During the Q2, our number of total new borrowers reached 823,000 up 22% year over year and 15% sequentially, validating our ability to grow our business across different countries.

Speaker 2

Notably, as we completed the transition to better quality borrowers in Indonesia and began to diversify our business model. The percentage of new international borrowers once again surpass the percentage of new China borrowers. Furthermore, our number of new borrowers in the Philippines continue to grow robustly in the Q2 increasing by 198% year over year and 69% sequentially. Our effective social media strategy in the international markets also continue to yield positive outcomes. As of the end of the Q2, our followers on leading social media platforms such as Facebook, TikTok and Instagram had risen to approximately 1,300,000 850,000 240,000 up 41%, 30% and 8% year over year respectively.

Speaker 2

Validating the strong brand awareness of deep localization we have created in our overseas market. As a fintech leader, technology is deeply engraved in our DNA. It remains the core of our business and our primary competitive edge. During the Q2, we hosted an internal tech competition called Hexon, bringing together 60 R and D teams for a 36 hour session in a closed stall environment. Vinyuan project included admin AI bots which can incorporate API function calls into large language models.

Speaker 2

Its framework can also be expanded to include multiple internal tools and support the management of different tools across platforms. Another standard eSound leverage AIGC to utilize fragmented time slots to increase productivity. We believe this project demonstrates great implementation potential for enhancing our operations and overall efficiency. Next, I'd like to share some updates on our ESG progress. We recently published our 2023 ESG report, the 6th in our company's history, highlighting our dedication to transparency and sustainability.

Speaker 2

In 2023, we advanced our mission of leveraging innovative technologies to make financial service better as well as our ESG strategy centered on technology, growing principle and the candidates. In addition to giving back to society with innovative technologies, the evolution emphasize integrity and compliance, low carbon development and harmonious relationships with employees, partners and the communities in its ESG management efforts. Moreover, we continue to support small business owners through the Q2's challenges. During the Q2 of 2024, we cumulated with served around 415,000 small business owners and facilitate RMB14.2 billion of loans to nurture their dreams. I also want to highlight our long standing cooperation with the national weightlifting team and congratulate them on their recent wins at the Paris Olympics.

Speaker 2

We are proud to promote awareness of the sport alongside the team and leverage their public image to help small business owners increase their product sales. Our joint initiatives embody our shared increase of the Olympic value of excellence, respect and friendship helping to create a better society for all. We will continue to integrate ESG management throughout our business operations and partnerships, propiling sustainable development across the industry. Before we move on to our CFO's review of operational and financial metrics I'd like to share that Finvolutions celebrate its 17th anniversary during the Q2, a milestone that inspires us to look toward our sustainable future. As such, we set our vision for 2,030.

Speaker 2

To become an international FinTech platform, connecting borrowers and financial institutions across multiple global markets and leading the industry in each of them. We will remain dedicated to leveraging innovative technology to make financial service better and greener, sustainably providing Finvolutions long term growth. To summarize, despite China's ongoing macro challenges, we successfully deployed our leading technologies and operation capabilities to achieve solid progress in the Q2 across all the markets in which we operate. Going forward, as China's macro environment improves, we are confident of resuming faster growth and delivering consistent returns across multiple metrics for all our stakeholders. With that, I will now turn the call over to our CFO, Jiayuan Xu who will discuss our operational and financial results in greater

Speaker 3

detail. Thank you, Lee, and hello, everyone. Let's go through our key results for the Q2. To be mindful of the length of our earnings call today, I encourage listeners to refer to our Q2 earnings press release for further details. Despite China's 5% GDP growth in the first half of twenty twenty four, uncertainties still persisted in macro environment.

Speaker 3

Small ticket items and tourism related activities remained the bright spot with the May holiday. 6/18 shopping festival and consumption related index all showing signs of improvement. However, China's overall retail sales slowed to 2% growth year over year in June, which did not reflect an optimal recovery trajectory. China's manufacturing PMI index remained largely stable in July with manufacturing PMI holding steady at 49.4 points. Concurrently, the manufacturing PMI and compensated PMI both reached 15.2 points, which is within the expansion range indicating Chinese enterprise gradually production recovery.

Speaker 3

In short, also China's economy is recovery. There are still pockets of Tubulars, which we will need to navigate using our vast experience and the technological and operational process. As Lee mentioned, our performance in the first half of the year was solid with transaction volume growth in both China and the international markets landing within our guidance range. This was supported by consistent excellence across numerous asset areas such as institutional funding, loan collection and the risk performance among others. Let me walk you through some of the details.

Speaker 3

During the Q2, our average borrowing rate in China remained stable at IRR 22.2%, validating our strong commitment to advancing financial inclusion. Given financial institutions growing desire to obtain good quality borrowers for our platform, our funding cost improved significantly, shrinking another 90 bps during the quarter and recording a cumulative improvement of 114 bps in the first half of twenty twenty four, leading to consistent improvement in our take rate. Such a huge semi annual improvement in funding cost and the scores financial institutions deep trust in our credit risk assessment capabilities and our ongoing enhancement of the quality of our borrowers. Given the quality of our borrowers and ample market liquidity, we are confident of achieving continued improvement in funding costs in the second half of the year. Regarding risk management, the recovery economy and our agile adjustment to our credit risk assessment models drove progressive improvement in our day one delinquency rate, which fell by 10 basis points sequentially to reach 5.1% for the quarter.

Speaker 3

From our vintage perspective, we maintain our view that vintage delinquency will stabilize at around 2.5%. By referring our responsive payment deduction strategy, we have enhanced the efficiency of our loan collection process, resulting in an improvement in our loan collection recovery rate to 88%, up 200 basis points from the previous quarter. We expect this strong recovery momentum of loan collection will persist in the second half of the year. Furthermore, as we continue to optimize our operations, we have strategically adjust our business portfolio to adapt our partners' evolving requirements. For the first half of twenty twenty four, transaction volume for our international market reached RMB4.5 billion, up 32% year over year to reach the upper range of our guidance.

Speaker 3

Supported by the strong global macro environment and our effective legal strategy, we believe our international business growth is sustainable with further diversification among different business models. Moving on to our international expansion efforts. Indonesia, our 1st and the largest overseas market has shown continued growth in SM macroeconomy throughout the first half of this year. With recorded GDP growth of 5.05% for the 2nd quarter and a targeted GDP growth of 5.2% for full year 2024. The Indonesia Consumer Confidence Index has remained high at about 120% for 18 months.

Speaker 3

The volume of motorbike sales increased 26% year over year and 17% sequentially to 599,000 as of July 2024 for data treating the nation's heightened consumer optimism. Beside a moderate correction to 49.3% in July 2024, Indonesia's manufacturing PMI has remained above 15% since September 2021, reflecting nearly 3 consecutive years of sustained economic prosperity. The unemployment rate decreased for the year over year in March 2024 to 4.8% from 5.5% in the same period last year, further strengthening consumers' confidence. After 2 quarters of business adjustment towards bad quality borrowers under the new pricing cap, we are proud to share that we have stabilized our operations in Indonesia and continue to gain recognition for local customers and other stakeholders. This recognition has attract new founding partners, including a leading local digital bank.

Speaker 3

We are also steadily building and strengthening our relationships with larger and more reputable local financial institutions to diversify our funding sources, thereby optimizing funding costs. Next, our 2nd international market, the Philippines. As of July 24, its manufacturing PMI has remained above 15% for 11 consecutive months. The Philippines labor market is also exhibiting positive momentum. With the unemployment rates dropping to 3.1% as of June 2024 from 4.5% compared to the same period last year.

Speaker 3

Furthermore, private consumption contribute to 72.5 percent of the Philippines' nominal GDP in the Q2 of 2024, reflecting robust domestic demand that will further support the nation's rapid economic growth. Notably, our Philippines operation continue to outperform expectations with the transaction volume growing 140% year over year and 20% quarter over quarter to RMB674 1,000,000 in the 2nd quarter, representing 29% of the international transaction volume. This outstanding performance reflects strong support from our local partners such as C Bank, Union Bank and Meyer Bank. Our latest funding partners who recently partnered with us on US47 million dollars program. With sufficient funding in place, we believe we can maximize the benefits of our e commerce cooperation with TikTok Shop, acquire additional new borrowers from diversified channels and sustain continued high growth rates.

Speaker 3

Now turning to our financial metrics. This quarter's operational expense lead to better than expected financial results. Net revenue for the quarter reached RMB3.17 billion, up 3% year over year. Our net income was RMB551 1,000,000, a 4% increase quarter over quarter, underscoring our operational stability. Meanwhile, sales and marketing expenses increased by 5% sequentially to RMB473 1,000,000 as we continue to invest in growth across all of our markets.

Speaker 3

As we restricted our business mix, our leverage ratio adjusted to 3.5 times indicating opportunities for tremendous growth when the economy further recovers. Our balance sheet remained robust with short term liquidity maintaining a healthy level at RMB8.1 billion, reflecting our strength and flexibility in executing our legal strategy to advance our international expansion and drive shareholders' return. Consistently rewarding our shareholders remain a top priority for 5xulushin, both through business growth across different markets and our market leading capital return program incorporating share repurchase and dividends. Our first share repurchase program began in March 2018 shortly after our IPO in November 2017 and has been widely impressed by our shareholders. Our buyback history indicates 2 repurchase programs with a total deployment of around US260 million dollars We are now conducting our further repurchase program of up to US115 million dollars Notably, in the Q2, we deployed around US13 million dollars and repurchased US6.1 million dollars ADS.

Speaker 3

For the first half of twenty nineteen, we have deployed around US57 million dollars for share repurchase. Our total cumulative share repurchase amount reached US337 million dollars as of the end of the second quarter. In addition, our dividends has steadily increased over the past 4 years with the cumulative dividend amount reaching US325 million dollars in total. Our capital return program has returned US US662 million dollars to our shareholders with our payout ratio rising to 49% of net profit in 2023. Going forward, we will continue to strengthen our capital return program for our shareholders.

Speaker 3

In summary, our solid second quarter results showcase our legal strategies effectiveness, our enable business model and our technological advantages. We expect our Indonesia operations to become profitable in 2024 and our Philippines operation to be contribute profits in 2025, boosting our confidence in deploying a more proactive international expansion strategy. As we capitalize on the massive opportunities in the international markets, we look forward to delivering sustainable growth and sharing our success with all our stakeholders. That concludes my prepared remarks. We will now open the call to the questions.

Speaker 3

Operator, please continue.

Operator

Thank you. And we will now begin the question and answer session. Our first question today will come from Cindy Wang of China Renaissance. Please go ahead.

Speaker 4

Thank you, management, for taking my call. And I have two questions here. First question is, could you give us some color on the trend of your China borrowers loan demand in Q2 and also in July? And the second question is the Indonesia, your customer acquisition strategy after the APR meet the requirement. And any update on the regulation front of the interest rate requirement in 2025?

Speaker 4

Thank you.

Speaker 1

Hello Cindy, let me do the translation. Regarding China demand during the Q2 the trend of our borrowers demand is largely in line with the weakness in residential credit demand. The daily application rate of repeat borrowers declined by mid single digit around 6% on an annual basis and quarterly comparison reflecting weak consumer confidence in July August. We have observed that the application rate of our repeat borrowers has increased by mid single digit between 6% to 7% on a daily basis. The demand of our borrowers is concentrated in the area of daily necessity.

Speaker 1

Therefore when the economy is weak it will show more resilience and we expect demand will gradually improve in the second half of the year. Hello Cindy, let me do the translation. From the international macro environment it is presenting a much more positive trend. After the Indonesia election right political situation has normalized with an improving economy such as GDP increase. And let us concentrate on our performance in Indonesia.

Speaker 1

During the Q2 transaction volume for Indonesia market reached DKK1.64 billion up about 6% to 7% annually with outstanding loan balance between DKK1.0 billion up about 4%. Revenue for the quarter reached DKK430 1,000,000. Number of borrowers reached 530,000 up 4% sequentially and number of new borrowers reached 200,000 up 9% sequentially. We have cumulatively cooperated with 7 financial institutions and all our funding is from local financial institutions now. Our Indonesian operations has completed its pricing transition in just 5 months and we have made adjustment in borrowers' cohorts, modest iteration and credit risk has improved by 28%, meaningfully offsetting the impact of interest rate reduction.

Speaker 1

Therefore, our take rate returned to 10%, reflecting our business entering a more stable growth. For the Q3 in the second half of the year and for the third quarter, we expect Indonesia operations will resume growth of over 10% with transaction volume potentially reaching new record high. Indonesia online operations will remain stable with credit risk customer acquisitions improving consistently. For offline operations, we have completed the acquisitions of a multi finance license with a controlling stake of 83.7%. Going forward, we will proactively explore both online and offline channels, multi products and buy now pay later installments for different scenarios such as etcetera.

Speaker 1

We will fully leverage our China expertise and leverage them in our Indonesia market to ensure future growth. Hello Cindy, any more questions from you?

Speaker 4

No more questions from me.

Speaker 1

Hello. Thank you.

Operator

And our next question will come from Yada Lee of CICC.

Speaker 5

Then I will do the translation. Hello management, thank you for taking my questions. And I was wondering what's the plan and the growth target for the company's domestic business. And I've noticed that the company has gained a slightly faster volume growth compared with the peers and looking ahead how likely the company can maintain such growth and how does the company balance the volume growth and profitability? That's all.

Speaker 5

Thank you.

Speaker 1

Hello, Yada. Let me do the translation for Alexis. As you know, China market has some changes this year and it is very different from the previous years. And currently, the scale of China consumer market has slowed down and entered into a stage of increased competition. After the physical risk fluctuation in the industry during the second half of twenty twenty three, many players have experienced varying degree of volume reduction.

Speaker 1

Under the uncertain macro environment, we are searching for certainty that is beneficial for us and execute sustainable development in China. We have a few ways to achieve this. First of all, we have certainty for success on acquiring new borrowers through information feeds leveraging on data and behavior. We continue to optimize the information feeds channels and improve the algorithms and conduct joint modeling to enhance ROI. And we are able to increase accuracy in determining the lifetime value of our customers and maintain stable customer acquisition strategy.

Speaker 1

Transaction volume contributed by new borrowers was up 2% 27% year over year. Our percentage of new customers was between 12% to 15%. At the same time, we are able to have better cost control and a healthy LTV level. Apart from information fixed channels, we are also actively diversifying our customer acquisition channels and have found multiple new internet platform partners to work with us. In addition, we are also leveraging on our brand to influence our borrowers.

Speaker 1

For example, during the Olympics period, our support for the national weightlifting teams has achieved tremendous success along with their wins at the games. Along with promoting a positive image for China Olympics we have also gained remarkable results of over 100,000,000 views and over 20,000,000 counts of video traffic transmission. And secondly the management of repeat borrowers is a certainty for us and we have over 17 years of operating history and we are very familiar with our borrowers. Through deeply excavating their diversified multi layers and differentiated requirements, we will then refer them with the most suitable product based on different scenarios such as user profiles and behavior characteristics. And all these have lead us to increase our users promotion impact by 36% in the first half which leads to a higher transaction volume for repeat borrowers.

Speaker 1

Thirdly, our business operations remain healthy with stable performance coupled with continuous improvement in funding cost which leads to progressive improvement on multiple fronts such as take rate. All these ensure our high quality growth which is above the industry and lay the cornerstone for our sustainable growth going forward.

Speaker 3

Okay. Thank you, Yada.

Speaker 2

I will take one

Speaker 1

Okay. Thank you, Yada.

Operator

Thank you. And our next question today will come from Alex Xie of UBS. Please go ahead.

Speaker 6

So my first question is on asset quality. So we have noticed early indicators have claimed to improve in the second quarter. Just wondering what are the key drivers behind a recent trend? And should we be worrying about any potential uptick in NPL in second half like in Q3 last year? And second question is on the sequential trend on the takeaway.

Speaker 6

What has been the

Speaker 2

key drivers behind? What's the

Speaker 6

outlook for second half? And is there any more improvement more room for improvement for the funding cost? Thank you.

Speaker 1

Hello, Alex. Let me do the translation. Regarding our overall asset quality, during the initial stage of the risk situation last year we leveraged on our years of experience and pre emptively accurate predictions of the industry trends, We tightened approval rates for riskier borrowers with higher debt, higher risk and deployed different strategies for medium risk group borrowers and quickly adjust the boundary strategies during the early stages of delinquencies. And in the Q1, risk performance stabilized and we are one of the earliest platform in the industry that are able to contain risk at a lower level. And during the Q2, we further optimized adjusted and iterate on the overall credit limit and explore solutions for different types of users, while maintaining growth in transaction volume and balancing risk.

Speaker 1

And we have also shared that during the Q2 our vintage delinquency remained stable at 2.5% while day 1 delinquency reduced by 10 basis points to 5.1% and loan collection recovery rate improved to 88%. And we don't think this situation will happen in the second half as the overall environment is much more stable now. I would like to share with you, like to share more information with you. Over the past 17 years in our operating history, industry wide fluctuations in asset qualities have occurred 4 times and such fluctuations on average last around 4 to 5 months with the longest lasting 7 months and the shortest lasting 2 months. The fluctuation for this round is considered to be mid term and the impact of fluctuation is smaller based on past recovery experience.

Speaker 1

The recovery process normally take place at between the 4th to 5th month. Therefore the fluctuation this time round is not unique and has already shown signs of recovery. And we are confident to handle any more of such fluctuations in the future based on our experience. Hello, Alex. Let me do the translation.

Speaker 1

Regarding take rate, during the Q2 our average borrowing rates remained stable at 22.2%. Funding cost optimized by Medibips in the Q2 while vintage delinquency remained stable at 2.5% and take rate further improved to around 3.1%. For the second half of twenty twenty four, we expect average borrowing rates will remain stable and funding cost advantage delinquencies to have further optimization. Our asset quality is popular in such environment and we are one of the few platforms that are able to maintain growth. This is the reason why we have more room to negotiate for better funding cost with our funding partners.

Speaker 1

Funding cost has accumulated improved by 140 basis points in the first half and improved by 90 basis sequentially and going forward we still believe it will have room for improvement based on what I have just said earlier.

Speaker 3

Okay. Thank you, Ed.

Operator

Okay. Thank you. As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Speaker 1

Thank you once again for joining us today. If you have any further questions, please feel free to contact TIM Physicians Group Investor Relations team. Thank you all and have a nice day.

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