J and Friends Holdings Limited Sponsored ADR Class A (JF) Q2 2019 Earnings Report, Transcript and Summary

Good morning and good evening, everyone. Thank you for standing by, and welcome to Pintec Technology Holdings First Half of 2019 Earnings Call. [Operator Instructions] Now, I'll turn the call over to your speaker host today, Ms. Joyce Tang, the Company's Investor Relations Director. Please go ahead.

Thank you, Operator. Hello, everyone, and thank you for joining us on today's call. Pintec has announced its first half of 2019 financial results before the market opens, and earnings release is now available on the Company's IR web site. Today, you will hear from Pintec's Chairman and acting CEO, Mr. Allen Dong, who will start off the call with a review of recent Company developments and strategies, followed by the Company's CFO, Mr. Steven Sim, who will address financial results in more detail. Before we proceed, please note this call may contain forward-looking statements according to the safe harbor provision for the Private Security Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the Company's control, which may cause actual results, performance or achievements of the Company to be materially different from the results. All forward-looking statements are expressly qualified in their entirety by the cautionary statement, risk factors and details of the Company's filings with the SEC. The Company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise except as required by the law. Please also note that the Company will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the generally accepted accounting principles in the Company's earnings release and filing with the SEC. You are reminded that such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measures, and that non-GAAP measures are not uniformly defined by all companies including those in the same industry. Now, with that, I'm pleased to present Mr. Allen Dong, acting CEO of Pintec. Allen, please go ahead.

Hello everyone. This is Allen Dong. I was recently elected as the new Chairman of Pintec's Board of Directors. And I am fulfilling the role and responsibilities of the Company's acting CEO, during the duration of the William's medical leave. On behalf of the Board of Directors, I would like to wish a Mr. William Wei, a complete and a speedy recovery. We look forward to his return to the Company. As a co-founder of Pintec, I've always kept the close-knit relationships with the management team, and have been paying attention to Pintec's status. Even with some challenges and adjustments, I have full confidence in Pintec and team to transcend its strategy in the business in the long run. We're far our 2018 annual report on July 30, 2019. Today, we will discuss our results for the first half of 2019, which includes both the first and the second quarter of the year. As some highlights of the Company's performance during the first half of 2019, the total volume of new loans that we've facilitated were RMB7 billion, which was decreasing compared to the same period of last year. As we continue to face business environment changes, funding structure of our loan facilitation business has changed with less reliance on P2P or Jimu Box funding. At a year-over-year basis, the volume of loans funded by non P2P financial partners increased by 36%, while the volume of loans that we facilitated in associations with Jimu Box or P2P decreased by 60%. Overall, the new loans funded by financial institutions other than P2P or Jimu Box as a percentage of the total volume increased to 70% in the first half of 2019. It is our strategy to reduce reliance on Jimu, and to expand financial institution partners. We have continued to adjust our products for better feeding needs of a variety of financial institutions. On the other hand, we'll also use the newly acquired or invested lending licenses such as micro-lending licenses and fracturing license to conduct corporation with big - with both business partners and the financial institutions. During the first half of 2019, total revenues were RMB479.5 million equivalent to $70 million, a year-to-year decrease of 17% from RMB577.7 million in the same period of 2018. Gross profit was RMB274.6 million, or $40 million, a year-to - year-over-year increase of 16.3%. Gross margin of the Company expanded to 57.3% from 40.9% in the same period of 2018. Net income was RMB73.3 million or $10.7 million, a year-over-year increase of 492% from RMB12.4 million in the same period of 2018. Since our inception, we have committed to improve financial services with modern technology and operations, particularly our services to financial partners, business partners and end users to power the entire loan origination and the management process. This has been the core of our business, despite developments of other tech solutions businesses such as wealth management and insurance. In line with the growth prospects of the China financial services market and our Company, we're planning to continue focusing on digital lending business, which will remain committed to strengthening services to financial partners. We also plan to utilize our own financial licenses for a better ecosystem. With our business partners, we continue to maintain the leading positions in the installment payments market for travel and mobile devices in the first half of 2019. At the same time, where we expanded services into other consumer industries such as education. In the travel segment, we made strides in [indiscernible] our cooperation with leading online travel platforms such as Ctrip and Qunar, while also developing partnerships with offline travel service group Sabre. In a mobile device market, we have already established partnerships with two of the three largest mobile telecom operators in China, wherever we launched a new partnership with several educational service providers. By partnering with industry pioneers in different areas, we are able to leverage their flourishing customer traffics and exhaustive service offerings to consistently augment the competitiveness of our product offerings. In August, we established a commercial factoring company with leading offline travel agency, Caissa Travel. Through this partnership, we will offer installment loan payments risk, and provide integrated online or offline shopping experiences to customers of Caissa, and other third-party platforms. We will be able to explore additional smart lending opportunities together with Caissa in the travel sector, as well as other financial products. We'll be able to explore additional - this factoring company will integrate our state-of-art capabilities in big data risk control and AI technology, with our extensive experiences in providing travel sector financial services. Our partnership with Caissa marks another important milestone for our expansion into the travel installment loan sector. Well confident that it will help us to improve our leadership in this sector. By leveraging our market leading capabilities in Internet product operation, big data risk control and AI powered financing applications, we continue to capitalize on China's booming consumer finance market opportunity. Regarding revenue segments, first in the technical service segment, we generate speeds by providing technical services such as traffic allocation, big data, credit assessment and the post-lending management to our financial partners, which will include commercial banks and other financial institutions. Our most occasions, it is not Pintec, but our financial partners who provide direct lending to the customer. We serve more as an intermediary and provides limited or no guarantee to fund providers. However, in order to cultivate new partnerships, we have started to offer guaranty provisions during the onboarding period to build relationships with our new partners, because it is customary for financial institutions in China to require such guarantees, one collaborate rating with intermediaries. We anticipate that an increased proportion of our revenues were coming from loan services, in which we will provide guarantees or credit assessment or credit enhancement for the short to mid-term. Therefore, as we accelerate the expansion of our financial partners base through all available channels, our revenues from guaranteed loans will likely increase gradually as well. Going forward, we aim to improve the flexibility and diversity of our services as we expand our business. By used our lending licenses and other strategies, we will propel our partnerships with our financial partners and in return grow our revenues. At the same time also plan to actively market out industrial leading - lending service platform and a full suite of value-added solutions to our financial partners. We'll confident that our cutting edge product offerings will help us to establish new partnerships, bolster existing collaborations and enrich customer stickiness. Second, in the installment service segment, we primarily generate fees, both by providing financing services by using our own licenses and by providing loans to borrowers through trust arrangements with financial institutions such as trust license. We bear credit risk for most of the installment loans that we facilitate and the related outstanding amount is reflected on our balance sheet. As of today, we mainly generate installment service revenue from our factoring business, which focuses on the travel and e-commerce sectors. Meanwhile, we aim to better utilize the online micro-lending license, that we obtained through an acquisition in March. As we test our new technology micro-lending operations, we'll continue to identify areas where we can further improve and optimize beyond these upgrades. We are also planning to cultivate more micro-lending centric collaborations with institutional partners. We believe that we can attract and retain business partners in a diverse set of industries by further utilizing our own lending licenses. We are also able to provide financial partners with high quality lending assets and a client base with good repayment track records. Third, in the wealth management service segment, we have developed integrated financial technology solutions to meet diverse customer demands. This includes smart wealth management and the smart insurance brokerage services. In summary, in the past six months, we continue to optimize our technical services, provide modest global expansions and establish additional strategic partnership with industrial leading business and a financial institution. Going forward, we will also strategically focus on lending services, especially the service we provide to our financial partners, as we fully utilized our lending licenses to deepen our relationship with both business and financial partners. We are confident that we will generate sustainable revenue growth going forward. In the end, FinTech market in China is facing massive opportunities as well as tightening regulatory scrutiny. While going to make adjustments to accommodate such environments, and I believe long-term sustainability is more important than short-term profitability. Next, I will pass microphone to our CFO, Steven to cover more information on financials.

Thank you, Allen. Hello, everyone. Before I start, please note that unless otherwise noted, all numbers stated in my remarks are in RMB terms. In the first half of 2019, our total revenues were RMB479.5 million, specifically revenues from our technical service fees, which accounted for 80% of our total revenues declined by 4% to RMB383.8 million in the first half of 2019 from RMB399.7 million in the same period of 2018. The year-over-year decline was due to the decrease of loan originations in the first half of 2019. Revenue from our installment service fees, which accounted for 17.1% of our total revenues decreased by 51.7% to RMB82 million in the first half of 2019 from RMB169.9 million in the same period last year. The decrease was as a result of reduction in our on-book installment loan volumes, which is also in line with the decrease of our own on-book loan business and part of our strategy to shift to an asset light model. Revenues from our wealth management service fees increased by 69.4% in the first half of 2019 to RMB13.7 million from RMB8.1 million in the same period last year. The increase was primarily attributable to the development and expansion of our wealth management services, in particular, our insurance solutions. Our costs of revenues decreased by 40% in the first half of 2019 to RMB204.9 million from RMB341.5 million in the same period last year. As a percentage of total revenues, our cost of revenues decreased significantly to 44.7% in the first half of 2019 from 51 - sorry, from 59.1% in the same period last year. The reduction was mostly due to a 59% decrease in our funding costs and a 72.6% decrease in our provision for credit losses, and 21.5% decrease in origination and servicing costs during the first half of 2019, as we reduced our on balance sheet loan balances. Our gross profit, as a result increased by 16.3% to RMB274.6 million from RMB236.1 million, and our gross margin expanded to 57.3% from 40.9% during the first half of 2018. The improvements in gross profit and gross margin were mainly due to the lower volume of our on-book loan business, which led to lower funding cost and lower provision for credit losses. In addition, we achieved better economies of scale across our business lines. Our total operating expenses in the first half of 2019 increased to RMB218.6 million from RMB186.9 million in the same period last year. Sales and marketing expenses decreased by 17.6% to RMB42.2 million in the first half of 2019 from RMB51.3 million in the same period last year. Since the end of 2018, the Company had begun optimizing its product structure and winding now the offline personal installment loan business. Offline, direct marketing group disbanded - were disbanded, and offline marketing and promotional expenses decreased significantly as a result. At the same time, marketing efficiency improved significantly. The general and administrative expenses increased to RMB131.2 million in the first half of 2019 from RMB96.6 million in the same period last year. The increase was primarily due to the increased professional service fees associated with being a public Company, bad debt provision, staff cost, and share based compensation. Research and development expenses increased to RMB45.1 million in the first half of 2019 from RMB39.1 million in the same period last year, as we continue to invest in our talent recruitment and enhance our R&D capabilities. Our operating profit in the first half of 2019 was RMB56 million compared to RMB49.2 million in the same period last year. Our net income in the first half of 2019 was RMB73.3 million, representing a year-over-year increase of 492% from RMB12.4 million in the same period last year. Excluding share-based compensation of RMB29.9 million, our adjusted net income increased by 218% to RMB103.2 million in the first half of 2019 from RMB32.5 million in the same period last year. The increase in net income was due to the increase of gross profit of RMB32.7 million in accumulated - and in accumulated interest income from a loan to Jimu. Net profit attributable to ordinary shareholders in the first half of 2019 was RMB73.3 million as compared to net profit attributable to ordinary shareholder of RMB20.8 million in a same period of 2018. Diluted GAAP and non-GAAP net income for ordinary shares were RMB0.26 and RMB0.36 respectively in the first half of 2019. Now, let's turn to our balance sheet. As of June 30, 2019, we had combined cash and cash equivalents, restricted cash and short-term investments of RMB730 million compared to RMB710 million as of December 31, 2018. Total net financing receivables, including short-term and long-term declined to RMB646.3 million at the end of - at the end of June 2019 from RMB761 million at the end of last year, mostly due to our strategy of lower volume for our own book installment loan services and shifting to an asset light model. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from the line of [Alice Jye] of China Renaissance. Please go ahead.

This is Alice from China Renaissance. And the question is, the Chinese visual lending market is not growing as strong as several years ago. What do you think it would influence the current lines of business in FinTech? And what is the future direction of FinTech in this market? Thank you very much.

Hey, Alice, this is Allen Dong. I think the observation you got of China FinTech lending sector does not grow as dramatically as a couple of years ago. I think it's a restriction of the structure because most of the existing leading FinTech companies focus on particular sector to make loans. But we believe the overall retail lending sector of China is still pretty big, and the whole FinTech industry were more focused on particular sector and is going to expand into the whole spectrum of the borrowers. For example, most of FinTech companies were the industry was focusing on people with less credit data what - with no credit data. But actually more and more matured customer base will have similar demands in the sector. So I believe the further growth of retail finance market will continue. And for us, it's more of building a diversified portfolio of borrowers. And as far as the structure is healthy, we still have a very big room to grow.

Now it's my next question. So my next question is, there are several additional lending business in China. And what do you think is the comparative advantage of Pintec?

Okay, Alice. Yes, even it looks like a - it's wretchedly crowded market, but if you look at pure number of players in the market is a lot less than years ago when the whole industry was booming. So if you're looking at only top tier FinTech lending companies or facilitation companies in the market, the number is definitely a lot less. I think it's within a couple of dozen in China. First of all, all players are only a small group to do such services out of the whole China market comparing with traditional financial institutions. Second of all, as I mentioned in the last question, now, we are facing a really massive market. As far as the structure of the potential clients are healthy, I don't think the competition is a issue for the Company to grow. It's really about how sustainable your model is, how good your risk management is, and how in compliance you are to make sure that you can grow further on. And as a very interesting phenomenon I've seen in the last couple of years, we haven't really faced any direct competition for any of the peer companies in the market. It's really about try to be as good as possible by yourself game in this sector. Okay. Our core competitive advantage - sorry, yes. Our core competitive advantage in this sector is really simple. We are a Company with combination of three different capabilities. First, our financial service capabilities, including the risk management; second, our technology will improve all of our operational efficiencies; and third, our customer service capabilities derive from our Internet DNA. So combined with these three capabilities is a very rare quality in the market. And even there are some players, I think there's still enough room for us to grow.

So my last question is, what are your next steps for the core businesses of Pintec? What are your future plans for the development in this market? Thank you.

Sorry. Can you please repeat the question?

No problem. So my last question is, what are the next steps for the core businesses of FinTech - of Pintec, and how do you manage to grow in the market? Thank you.

Sure. As you might know, Pintec started as a tax solution company and we are capable of providing technology solutions for different types of financial product sectors. But giving the current market environment, actually in the short run, our focus is more going to be lending solutions, which will continue to grow our total asset on the management in terms of how much loans were facilitated through working with third parties or with our own lending licenses. I think with this foundation, we'll be able to gradually improve our capabilities in other related areas, including wealth management and insurance. But in the short to mid run, the less margin business will be less of a priority. And in the future, we'll be able to have the - enough resource and capability or focus on those.

Our next question is from the line of Daphne Poon of Citibank. Please go ahead.

So a couple of questions from my side. So first one is about the institutional funding model. So we'll be wondering, right, as you increase the portion of loans from the buy financial institutions, what will be the types of new financial institutions that you introduce? And also regarding the takeaway, so how does the takeaway for the guarantee model compared to the - of the long guarantee loans? And second is about the asset quality outlook. So I guess if we look across the sector, we do see that the - I guess, as a quality of risk or as a quality outlook is getting more challenging with the economy slowing down. So we'll wondering how the management see this like from your point of view, and also how that - how does that impact your growth outlook? I guess for the second half of this year, especially as we are also seeing in the first half like the growth has been slowing down, so whether you expect like continue relatively slow pace of loan growth or do you expect any recovery going forward? And lastly, it's the about the - you mentioned about the use of the micro-lending license and also the factoring license of all lending. So the question is, if we look across other payers who also use this whole funding model along facilitation model, they don't really lend for a license. So we'll be wondering how your model differs compare to your peers? So that's all my questions. Thank you.

Daphne, so this is Allen. Hey, as we keep diversify our - what we call financial institution partners, majority of this sector includes most lending licenses in China. As you might understand, there a variety of bank like or quality lending licenses in China that we can work with, for example, banks in many different ways and also trust companies, micro-lending license companies, consumer finance companies or even some secluded house, which will be able to provide us funding fund from securitization. So in terms of the take rate question, I will leave Steven to explain, and I will continue with other questions.

Sure. So Daphne, this is Steven. So I think the question on the take rate specifically relating to - on those that we take on limited risks, and we show up in the financial statements as guarantee and liability. So we do not disclose specifically as a separate item, the take rate. But quality - qualitatively, I tried to give you some color. I think on the whole, when we look at the market, it's not so much that we are consolidating because as Allen mentioned, the market is still big enough to expand. And even though in some specific cases you see regulatory tightening or you may also see certain players being very volatile. But in our case, we focus on serving our business and financial partners. And in such situations, we do actually have some leverage over the kind of margins we can expect to make on a particular business, on a particular product. In such situations, I think, our take rate has always been pretty healthy. And we feel that it's actually going in a good direction because as you know, the players we use to a healthy participant in the market, we see more and more rational behaviors from our different partners. And they value. They don't just value financial returns, they also value the customer service, the speed of response, technical capability. So in that sense, we do have some leverage over the kind of prices that we can combine. And, you know, with the funding cost also rationalizing, I think we should be able to well-placed to so called select healthier margin products to work on in the future. I think the next question is on asset quality. I think again, in our press release, we do disclose the various delinquency rates. So for the focus of answering this question, we will not repeat the numbers. But I think qualitatively in a way it's on a risk adjusted basis that is a better understanding of how much our work delinquency rate has increased or decreased over time. In that sense, one side of the picture is the actual delinquency rate, but the other side of the picture is actually the risk adjusted margin. So in that respect, again, we are focusing on the healthier business products, and in that sense we will have more cash generation and also more profit generation. Allen, please?

Yes. Regarding quality of the assets, I have a couple of points to add. So we definitely have experienced or have seen the volatility you see in terms of delinquency rates in the market. I think this is a result of two major reasons. One reason is micro-environment change, including the regulatory environment change. The second reason is the concentration of a customer group by most FinTech players in China. And interesting to see if we break down our portfolio into different sectors. For example, we have done point of sales consumer installment loans, we have done SME - online SME loans, we have done personal loans, and we have find different volatilities of different type of assets targeting different customers. And I think the signal for us is very clear. We're trying to improve the diversification of the portfolio more towards a prime and near prime customers, which shows a higher quality of risk volatilities to our point of view. And that sector is less crowded in terms of competition. Even we don't think competition is a real issue in this industry. So your third question or fourth is regarding the growth of second half. I think, you know, leave to our second half numbers to show eventually. I just want to restate it what I mentioned in my script that we think this market is not about competition. This market has no limits of growing, so how to make sure we are in good position to grow sustainability is much more important than the short-term profitability. That's why we’ll focus better positioning ourselves in the second half of the year but we will still have a lot of business opportunities with current infrastructure to go. And your last question is regarding how to utilize our micro lending license. So micro lending license especially the license we have is very limited so called Internet micro lending license in China. The number is very limited it's a very valuable license allowing us to practice business nationwide online. Perfect feeding our business needs and at same time we can leverage - we can deploy our own capital to lend directly. But on top of that we can also get reasonable leverage from financial institutions. And more importantly which is proved by many examples in China is micro lending licenses or other lending licenses we have is a perfect vehicle for further securitization of underlying assets. You know securitization market in China for this sector is still underdeveloped even the market demand is very strong and we believe that will offer us a great opportunity to further grow our portfolio, that's our answers.

Just a follow-up on the micro lending license. So what is the maximum leverage that you can leverage up to? And also you mentioned about securitization as opposed to also be subject to that - leverage cap rate and the declared rev ratio...

I'll say so far it’s actually subject to different scrutiny of different areas. We have seen the conservative leverage of micro lending license of about 1 to 2 times of your total capital. But we'll have also seen example that is much higher than that. I think it all depends on, first the underlying assets quality of how you practice business with micro lending license. And the second it also depends on your composition or efforts with the local regulator which will allow them to understand your business better and allowing to have more flexibilities, but I will see two to three times of your capital will be reasonable. And on top of that when you're talking about securitization and it's a different level of question for micro lending license because there are on book securitization and there are off the book securitization. So for example for off the book securitization you issued the loans with micro lending license and you can sell that to the ABS market. As far as micro lending license doesn’t provide credit guarantee or guarantee enhancements to the deal, the bunch of third-party guarantors in a market will like to wrap high quality consumer finance loans. And that part of the leverage will not be considered in a restriction. So we'll figure it out in actual practice.

Our next question is from the line of [indiscernible] of ICBCI. Please go ahead.

Thank you management for taking my questions. We noticed that many FinTech companies have deteriorating their pace in transition towards 2B local business [emphasize] shifting from consumer side to business side and Pintec is one of the pioneer in such transformation. May I know what's the reason behind the sharp transformation towards 2B and what the actions the company will take depends on which transformation in the coming years or near future. And how that will support the company's revenue growth and now that’s the only question I have?

Yes, Linn this is Allen. Thanks for two question. Yes, we have find like many FinTech companies in China emphasize their 2B strategy. What I want to see is okay I will restated my points I mentioned before. This is a huge market so no matter how you play as far as you find your sustainability, I think you’ll be able to fund a good room to grow, but as a many FinTech companies in China are radically more start-ups. As you can understand either the traffic side or funding side are not FinTech companies strength in this market. So that makes a perfect sense for FinTech companies to work with either what we call business partners or financial institution partners to get the platform in fact works. So no matter how they position the business model, I think working with the existing institutions with either traffics or funding capabilities is voidable in a market. But for Pintec as day one we have find other than just purely focused on what end customer needs in terms of the borrowers or investors. We can also focus on how to help our financial institutions or business partners to improve their efficiencies to improve their user experiences in very in depth way is a very valuable practice. So that's why I think even other companies might see well a P2P well, a 2B business model but it will not really change the nature of the business. Is we are going to leverage existing institutions in the market with funding and traffics and help them to create value out of our capability.

Thank you. [Operator Instructions] There are no further questions at this moment. And I will hand back to the management for the closing remarks.

Thank you everyone for taking your time to join our conference call today. We look forward to see you next time. Thank you very much.

Thank you. Ladies and gentlemen that does conclude the conference for today. And thank you for participating. You may now all disconnect.