Yiren Digital Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 20, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the Year End Digital Second Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ke Yao Investor Relations Officer.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning or good evening, everyone. Today's call features a presentation by our Founder, Chairman and CEO, Mr. Lin Tang and our CFO, Ms. Na Mei.

Speaker 1

Our new CFO, Mr. Yu Ning Feng, will also attend the Q and A session after prepared remarks. Before beginning, I would like to remind you that discussions during this call contain forward looking statements made under the Safe Harbor provisions of U. S. Private Securities Litigation Reform Act of 1995.

Speaker 1

Such statements accept risks, uncertainties and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding future risks, uncertainties or factors is included in the filings with the U. S. Securities and Exchange Commission. We do not undertake any obligation to update any forward looking statements as required under the relevant law.

Speaker 1

During the call, we will be referring to certain non GAAP financial measures and supplemental measures to review and assess our operating performance. These non GAAP financial measures are now intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U. S. GAAP. For information about these non GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

Speaker 1

I will now pass it to Ning for opening remarks.

Speaker 2

Thank you all for joining our earnings conference call today. Despite the evolving market environment, we are pleased to report another solid quarter with strong unit economics, reflecting the resilience of our business structure and operational strategies, as well as our commitment to quality control to quality growth over MAIR expansion. Additionally, our strategic investments in AI and the seamless integration of technological innovation into our operations have fostered due growth in both technological advancements and operational efficiency. Our strategic direction positions us well to evolve into a leading AI driven platform, paving the way for groundbreaking solutions and setting new industry standards. Now, I would like to go through our business highlights for this quarter.

Speaker 2

First, our financial services business. The Q2 of 2024 saw a steady growth with total loan volume reaching RMB12.9 billion, marking a 59% increase year over year and maintaining a resilient consecutive quarterly growth despite an industry slowdown. The momentum is largely driven by the concrete growth of our new customers with higher credit quality. As we continue to optimize our asset quality of loan portfolios. Since the second half of twenty twenty three, when the entire industry experienced substantial credit risk fluctuations, we started to proactively upgrade our customer mix and diversify our online acquisition channels.

Speaker 2

The strategy has proven effective, leading to secure growth and improved asset quality. Meanwhile, we have refined our proprietary RTA credit model for borrower acquisition, which has notably enhanced our overall credit approval efficiency. In this quarter, the number of borrowers served increased by 47% year over year to 1,500,000. Moreover, our loan facilitation platform continues to gain popularity with monthly active users rising by 88% year over year to 4,500,000 in the Q2 of this year, showcasing strong customer engagement and loyalty as we maintain our focus on attracting high quality borrowers and note that existing high value borrowers repeatedly use our revolving loan products, we expect this growth momentum to continue throughout the year. Meanwhile, our international business is showing exciting progress.

Speaker 2

The total loan volume overseas nearly doubled in the Q2 of 2024 compared to the prior quarter. In the Philippines, monthly loan volume facilitated exceeded RMB20 1,000,000 milestone with the growth rate remaining robust as we move into the second half of the year. Moreover, as our business continues to grow, we are benefiting from economics of scale with customer acquisition costs decreasing by 18% quarter over quarter. In June 2024, our business in the Philippines achieved a positive net profit margin. It's worth mentioning that our rapid growth is closely tied to our AI development and integration.

Speaker 2

Our proprietary large language models have been implemented across various operations, including customer acquisition, customer service, risk management and asset management. For instance, in our international operations, our anti fraud AI models have processed over 10 different types of identification documents this quarter, achieving a 93% accuracy rate and significantly enhancing our risk management efficiency. Additionally, to standardize our services, our large language models are used in our overseas call centers to translate local languages, detect sensitive words and analyze service quality and assurance, thereby boosting customer satisfaction. As more data are processed, we expect continued enhancement of our models in both accuracy and their applicability to a wider range of scenarios and uses. Turning into asset quality, delinquency rates continue to show an encouraging trend as assets from upgraded borrowers increase.

Speaker 2

Specifically, the 15 to 89 day delinquency rate for the Q2 of 2024 declined to 3.8%, down 10 basis points. The FPD 30 plus delinquency rate decreased for the 3rd consecutive quarter and that the M1 collection rate for the Q2 of 2024 increased by 290 basis points quarter over quarter to a historic high. We expect a sustained improvement in asset risk performance in the second half of this year as we continue to optimize our customer mix and retune our credit risk models. Now on funding cost, our effort in building an efficient funding management system is showing results. In the Q2 of this year, our funding costs decreased by 82 basis points quarter over quarter, reaching a historic low and exceeding our internal target.

Speaker 2

The downward trend will continue in the Q3. Moreover, given the current market funding conditions, we are strategically increasing our loan volume under the risk taking model to better balance risk management and profitability. Regarding our insurance brokerage business, we have focused more on property insurance and expanded our customer acquisition channels to hedge against the ever changing regulatory environment and uncertainties in the life insurance sector. In the second quarter, gross written premiums totaled RMB1.1 billion, reflecting a year over year decrease of 20% and a quarter over quarter increase of 16%. The annual decline was primarily due to the impacted life insurance business, which experienced limited sales of 1st year premiums as a result of product changes and the new regulations.

Speaker 2

The quarter over quarter growth in premiums is largely attributable to the property insurance business, where premiums reached RMB557 1,000,000, marking a 19 increase from the previous quarter and setting a new record. Going forward, we will continue to focus on 3 key areas in our insurance business. First, strengthening channel partnerships and expanding the scale of property insurance, optimizing our product mix and continuously increasing the proportion of higher profitability products, such as liability insurance. 2nd, in life insurance, we will focus more on high net worth clients, addressing their comprehensive protection needs for retirement and savings. Thirdly, we will enhance online customer acquisition by utilizing AIGC tools to improve market outreach and boost sales volume.

Speaker 2

In our consumption and lifestyle service segment, our GMV increased by 40% year over year to RMB554.6 million. However, due to the high penetration rate of these services among our current customer base, we are observing a moderation in growth rate. Moving forward, the company will focus on acquiring new customers and refining customer profiles to better understand and address their comprehensive needs. Moreover, with the aim to enhance shareholder returns and boost the market confidence, we are pleased to announce that the Board has approved a new dividend policy. Under this policy, the Board plans to declare dividends amounting to no less than 10% of the company's anticipated net income after tax for each half year, starting from the first half of this year.

Speaker 2

The cash dividend for the first half of twenty twenty four set at $0.2 per American depository share is expected to be paid on or about October 15, 2024, to holders of the company's ordinary shares and ADS of record as of the close of business on September 30, 2024, Hong Kong Time and New York Time, respectively. We would like to express our gratitude to our shareholders and investors for their ongoing support. Finally, we have a management change to announce. First, let me introduce our newly appointed CFO, Mr. Yuning Feng.

Speaker 2

Yuning possesses over a decade of experience in venture capital investment, investment banking and financial control. Before joining us, he was a partner at C Innovation Capital, where he led investments in Fintech, Enterprise Solutions and AI sectors. Prior to that, Yuning was also served as an investment banker at China Renaissance and a Financial Controller at Goldman Sachs and UBS. We are confident that Yuning's extensive experience and proven track record will enhance our global strategy and AI focus. And we look forward to the positive impact this will bring.

Speaker 2

Also, on behalf of the Board, I would like to extend our deep gratitude to Na for her significant contributions and outstanding work during the past years. With that, I will pass it to Na, who will go through the financial performance for this quarter. As this marks her final earnings call with us, we once again thank her for her leadership and wish her continued success.

Speaker 1

Thank you, Niu, for all the kind words and support. Hello, everyone. On this call, I will only focus on our key financial highlights and Yu Niu will draw us for the Q and A section after the prepared remarks. First of all, we are glad to deliver a solid quarter with a healthy profitability. In the Q2 of this year, our total revenue reached RMB1.5 billion, 30% increase year over year.

Speaker 1

In the financial service segment, total loan facility continued to grow slightly, which RMB12.9 billion, up 59% year over year. This is mainly driven by the growing number of our new powers and a strong demand of our small revolving load products. Revenue from financial service business increased to 46% year over year to RMB851 1,000,000. The momentum remains strong throughout the year. In the insurance sector, our gross renting premium was RMB1.1 billion, a decrease of 20% year over year, but increase of 15% compared with the prior week quarter.

Speaker 1

The year on year decline was driven by a substantial drop in our life insurance sales following local regulation change. During the same period last year, sales of life insurance products with a capped 3.5% interest rate surged before being withdrawn from the China market due to the new regulation. Therefore, the primary in the Q2 of last year was something high, making sharp contrast to the decline of the Q2 this year. Meanwhile, the quarterly growth in our total premium was mainly driven by the expansion of our property insurance business. Consequently, the portion of property insurance in our overall primary lease increase translating into a lower average revenue ticket rate due to the lower commission fee rate compared with the life insurance product.

Speaker 1

In the Q2 of this year, revenue for our insurance segment reached RMB91.5 billion, down 77% year over year. Going forward, we had continued growth in our property insurance business in the 1st full future and gradually covering our life insurance products along with the market trend. In the consumption and lifestyle segment, the total GMV for this quarter reached RMB555 1,000,000, an increase of 40% year over year, but a decline of 11% quarter over quarter. As mentioned by Niu, as the penetration rate of service and products in this segment grows into a substantial level, risk tax growth rate of this segment will continue to moderate. On the expense side, sales and marketing expense increased 21% year over year to RMB285 1,000,000.

Speaker 1

This growth was mainly fueled by the suspension of our finance service segment and the enhanced marketing efforts focused on attracting new and high quality customers as we continue to redefine our customer base. Research and development expense increased to 69% year over year to RMB56 1,000,000 due to our ongoing investment in AI enhancements and the technology advancements. Our general and the service costs decreased to 29% year over year to RMB247 1,000,000. This is primarily attributable to the deeply insurance business volume, potentially the sharp decrease in the first premier for our life insurance products, which led to a low channel rebates and a relevant settlement cost. Our G and A costs increased 8% year over year to RMB38.7 million, remained largely stable.

Speaker 1

The launch for contra assets and receivables was RMB123 1,000,000 for this quarter, a 152% year over year increase and 20% quarterly growth. The increase was mainly drawing price growth in total loan volume facility. Moreover, provision for Towneij liability in this quarter increased to RMB278.9 million for RMB12 1,000,000 in the same period of last year. This is due to a rapid write up in loan volumes facilitated by our risk taking model, which led to a significant upfront provision and a current accounting policy. However, over time, this provision will appear to be transferred to guaranteed service fees.

Speaker 1

Actually, in the Q2 of this year, the revenue from guaranteed service reached RMB78.9 million, more than 4 tenths of size in the same period last year. Now on the bottom line, our net income decreased 22% year over year to RMB40010 million this quarter due to three reasons. Firstly, our profitability in the insurance business declined as mentioned above. Secondly, marketing expense increased due to our ongoing investment to attract new high quality borrowers for our financial service business. Thirdly, substantial upfront provision has been accrued as we read up our loan volume under the risk taking model.

Speaker 1

Currently, our profit margin reached 27.4%, still a heightened level in the industry. Regarding the cash flow, we generated probably RMB369 1,000,000 net cash from our operations in this quarter, remaining healthy and strong. On the balance sheet side, our balance sheet remains strong with RMB5.5 1,000,000,000 in cash and cash equivalents as of the end of this quarter and we are trying to diversify voice to enhance our shareholder returns. As Niu just introduced, we are pleased to announce a semi dividend plan with no less than 10% of our after tax income for the prior 6 months, distributed to our shareholders. A credit dividend of US0.2 dollars American Disparks Re Share is intended to be paid on or about October 5, 2024.

Speaker 1

For holders of the company's outer shares and ADF of record as of close business on September 13, 2024. Moreover, we are still doing share buyback. In the Q2 of this year, we allocate US4 $1,000,000 to repurchase shares in the pipeline market, where our total deployment for the share repurchase program to US13.5 million dollars by June 13, 2024. Lastly, our business outlook is our seismic and the car business and the marketing condition. We expect our revenue for the Q3 2024 to stand between RMB1.4 billion to RMB1.5 billion with the house and land profit margin.

Speaker 1

This represents our current and preliminary assessment, which may be subject to change and uncertainty. That concludes our remarks. Operator, now we are open for questions. Thank you.

Operator

We will now begin the question and answer session. The first question comes from Ethan Yu with First Trust Group Inc. Please go ahead.

Speaker 3

Hi, good evening. Thanks for taking my question. Congrats on another solid quarter. My first question is about your AI development. As disclosed in your ESG report, the company has developed a range of AI systems regarding your AI strategy.

Speaker 3

Have there been any notable advancements in AI applications or research? Can you share more details about MA specific investments in AI sector? And also, has there been significant breakthroughs in our AI product commercialization.

Operator

Excuse me, Ethan, I'm sorry, you're not coming through clearly. Is it possible to move the microphone closer to you and repeat, please?

Speaker 2

I got the majority of the question and it's about AI development investment commercialization, right?

Operator

Yes. Okay. He accidentally disconnected. Just a moment. He must have pressed something accidentally.

Operator

So we will would you like to go to the next question and have him come back?

Speaker 2

Follow you.

Operator

Would you like me to have the next questioner ask? And then when

Speaker 1

Yes. You can ask when you arrive, I think, yes. Let's go to the next question.

Operator

Thank you. Okay. The next question is from Bruce Orrin with BlackLab Fund. Please go ahead.

Speaker 4

Yes. Hello. I'd like to express appreciation to the Board for the new dividend. I mean, that's a good move. I'd also like to congratulate and thank Mrs.

Speaker 4

Na Mae for helping to build an extraordinary company under circumstances that were often difficult. Thank you. I have two questions. The first is, could you add some insight into the large second quarter increase in net cash used in investing activities and net cash used in financing activities? And my second question is, where is most of the international business growth?

Speaker 4

Thank you.

Speaker 2

Can Naa please cover them first?

Speaker 1

Yes. As my question in my script, for our operating business, we can earn the slight income operating above As we mentioned in Q4, through the purpose of our financial service segment, the management is more financial leasing opportunity to pay likely our company is

Speaker 2

I cannot hear you very clear now.

Speaker 1

Now it's better. I'm close to the phone now.

Speaker 2

It's better now. Yes.

Operator

Thank you. Please repeat. Thank you.

Speaker 1

Also now I will

Speaker 2

cash items and also our international business, yeah, market.

Speaker 1

Yes. I'm going on the explaining our investment cash flow, the reason why we increased so much in the Q1. And as I mentioned, as you remember that last year, we purchased a new financial guarantee company, Chongqingtong, to our financial service segment purpose. And for this year, the management is still going on to implement a financial license to purchase for our financial service business like the AMC, Access Company and the micro small lending companies and other financial guarantee companies for business development purposes. So for these financial license companies, before the formal come to the formal operations repurchase process, based on the communication status, we should replace the investment amount to our partners to lock the acquisition target.

Speaker 1

So you can see our investment cash flow is remains catch out that most of our investment payment to our potential financial lease target. Hope my question is answered my answer is ask your question.

Speaker 4

Yes. Do you see the cash used plateauing or continuing to grow greatly?

Speaker 1

Yes. I think you can see for the cash from the operating, we'll keep the healthy and stable cash flow. Also, we have used the cash to other investment opportunities, no matter the internal financial license or the international overseas business development, also in our AI strategy. We also have many cash expenditure. But in our forecast, we still have the confidence in our cash and cash equivalents balance with a strong status in the next quarter.

Operator

Thank you. Once again And

Speaker 2

our international business covers the Philippines and Mexico. And we are also looking to expand to certain other markets in Southeast Asia and other parts of the world. Is the first, yes, gentleman back?

Operator

Yes, we have him now.

Speaker 2

Okay. Please go ahead. So we cover, yes, the AI investment implementation part? Yes?

Speaker 3

Yes, yes, yes. Hi, Ethan again. Can you hear me now?

Speaker 2

Yes, I can hear you very clearly. Actually, as I reported, yeah, at the beginning, we use AI extensively in our operations. And we also try and leverage the technology capabilities developed internally for potential like external opportunities like we have FinTech partners, financial institutions that are interested in our solutions. And yes, I hope we'll see some results later this year or first half next year. At the same time, we try and build a strategic investment and partnership infrastructure like ecosystem.

Speaker 2

And so we've made a couple of small, but in my view, hopefully, very promising investment in the AI space. But their contributions are very tiny. And as I yes, going back to our like the AI like the use cases internally, For example, like, yes, we use AI in customer like acquisition, customer service, like we use robots, like yes, and the large language models for like incoming outbounding costs, like say, when we detect customer like emotions, yes, change, yes, it's time to switch to like human, like, yes, operator, we will do that. And also, yes, the machine can interact with customer up to the right point to switch to the human and so on. And of course, we use like voice recognition, like technology.

Speaker 2

And also, I gave the example like, yes, we our large language models used in the Philippines, right, can do like a greater like a visual recognition algorithm, like because in the Philippines, like IDs, personal identification, like paperwork is really paper. So it's not very digital and it takes quite some skills to detect risk. So AI plays a key role there and so on. So yes, basically, yes, we use AI extensively in our own operations and some like, yes, technologies that really welcomed by outside, like partners, prospect, like buyers, yes, so customers. So we'll try to monetize these technologies as well.

Speaker 3

Okay. Thanks, Tom. My second question is there is a continued rise in your R and D costs. Could you share us more color about how these costs have been used?

Speaker 2

Yes. So for our like AI, like large language model development, yes, we take like open sourced like a model combined with our own data and business algorithm to develop our proprietary models. And we purchased hardware and develop software and so on. And so in the Q2, I believe, yes, it was about RMB56 1,000,000. Yes.

Speaker 2

So I think this is a money well spent. And yes, so I think our investment in AI has been prudent. But yes, strategic for the future.

Speaker 3

Thank you, Ms. Tom. I have another question about your yes, can I ask one more question about your overseas business?

Speaker 4

Sure.

Speaker 3

Yes. Can I know what is the total loan volume facilitated overseas in Q2 2024? I'm impressed with the growth rate achieved in Philippines and also you have mentioned that you have made another progress in Mexico and what is the driving rate achieved in Philippines?

Speaker 2

Yes. So the freight is say it again, sorry, the last part?

Speaker 3

Yes. What is driving this growth and what's your outlook for the revenue generated from overseas business and profit in, let's say, second half twenty twenty four or the coming 2025?

Speaker 2

I see. Well, yes, the growth rate has been phenomenal, largely because the base is too small. So we really hope to grow the base. And so, yes, the second quarter like loan volume was RMB63 1,000,000. And so, yes, and we expect to do like an over RMB100 1,000,000 in this quarter.

Speaker 2

We hope to maintain, yes, a relatively high growth rate like, yes, for the foreseeable future just because the base is still small. And also you asked about the growth driver. I mean, the Philippines and some other countries in South Asia also in Latin America, they are large countries, yes, with population of over like 100,000,000. And also the target customer base is very young, which we like very much. And so they have really strong demand for like convenient credit.

Speaker 2

Yes, like but the market certainly lacks such opportunities. Yes, it means. So we are there to leverage the capabilities we've developed in Mainland China. And yes, so I think this is a very, very big opportunity, frankly speaking, for us to do like credit tech outside of Mainland China in these like large population, young markets like where digital finance is still in very early days and booming. Yes.

Speaker 3

Okay. Understood. May I know the current customer acquisition cost for these countries, especially in Philippines?

Speaker 2

No, you have this number.

Speaker 1

Yes. For our Philippine business, due to the acquisition cost is based on our new customer acquisition strategy. And based on the current data in this quarter, about 1 person is around $5 or $10 a 1 unit person. But I think in the second half year of this year, as Ming mentioned above, we want to we hope and look forward our development growth, our Philippine business and other wholesale business. So in the second half of the year, for our business development, we will implement expense to our new customer acquisitions.

Speaker 1

So we spent the acquisition rate of 1% will be a bit increased in the 3rd and the 1st quarter, but in this quarter it's about $5 or $2.1 percent.

Speaker 3

Yes. Okay, got it. Thanks again. Have a great evening.

Speaker 2

Thank you.

Operator

The next question comes from Dylan Paul, Dylan Paul and D. Please go ahead.

Speaker 5

Yes. Can you hear me? Yes. I'm going to switch off speaker like you recommended. Yes.

Speaker 5

Thank you so much. This is Dylan Paul here, Private Investor. Myself and my friend, Dale Tiansen, who is very sorry he can't be here, have been following and invested in the company for a couple of quarters now along. And we want to thank you all for the strong result. We'd like to hear and also mention that we'd like to hear from any people listening to the call who are interested in sharing bidirectional insights.

Speaker 5

So please reach out to us via email or social media, which is easily found online. We have two questions. The first is related to the Guarantee business. And I will say that these questions actually that Dale is the one who's most talented in understanding and insights on the business. So I won't be able to ask any further follow-up, but I wanted to get them out there for his sake.

Speaker 5

The first is related to the guarantee business. It seems like this is becoming a growing part of the business and we are interested in some additional color. Maybe you could speak towards how the guarantee contracts work in terms of sharing of credit risk and what that means for a return relative to default relative to the default rate on the underlying loans. And we also understand the accounting to be atypical for provisions. Could you maybe explain just how the accounting works or provide additional color?

Speaker 5

And would it be helpful to show progression of loss provisions to write offs in the quarter similar to how you do for contract receivables in the 10 ks? And then the second the final component, which again maybe I should be separating things. Well, actually, let me stop right there and then it sounds like sorry, this is my first time doing a call before. It sounds like I can come back and ask that second question. I won't have any follow-up on the first because your answers, I won't be able to adequately process on the way Dale does when he's listening to them.

Speaker 5

So let me just stop right there with those first that first question there or question.

Operator

Yes. So,

Speaker 2

now we can please we'll try to cover that. Maybe I can suggest that, yes, we can have a follow on call to go into some of the details with your friend.

Speaker 5

Okay. Got you. All right. That's fine. And then let me see then whether you have the same recommendation for the second question then, which is it's related to the parent controlling shareholders structure, which I guess we can do or Dale in particular, but we have continued to be confusing for us.

Speaker 5

And I know we have asked about it before, but just wondering, is there any further color you can provide regarding credit ease and how the relationship works with Yiren, which again, I've been involved in that question before. And so I know you've addressed it. And then he mentioned this before that he knows there's a large transaction in 2019, but and this is maybe the new part that can be addressed. And nothing has happened since. But are you expecting any related party transactions coming up here, if you're able to speak to that?

Speaker 5

And thank you.

Speaker 2

Not as substantial as like the one you mentioned several years ago, not even close. Yes. Okay.

Speaker 5

All right. Well, that's all of my our questions or Dale's more specifically. And again, most importantly, thank you for that tour that you guys gave me while I was in China and answering questions at that time and all your efforts that you've done with both myself and Dale to help understand the company and we are currently very bullish and excited about everything you guys have accomplished so far.

Speaker 2

Thank you. You are more than welcome to come back, see us. And so, yes, we'll book a follow-up call to cover, yes, all the details. Yes.

Speaker 5

And again, Dale is a technical guy. That stuff confuses me too. I can't follow him sometimes on my stuff. So thank you.

Operator

This concludes go ahead please.

Speaker 1

Okay. Thank you for listening. I hope you will come in again later. Okay. Thank you.

Operator

And then this concludes our question and answer session and concludes the Year End Digital conference call. If you have any further questions, please contact the Investor Relations team at Year End Digital.

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Yiren Digital Q2 2024
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