LexinFintech Holdings Ltd. (LX) Q4 2019 Earnings Report, Transcript and Summary

Jay Xiao - Founder, Chairman, Chief Executive Officer Craig Zeng - Chief Financial Officer Ryan Liu - Chief Risk Officer Stanley Zhou - Senior Financial Director Tony Hung - Senior Director of Capital Markets / Investor Relations

Hello, ladies and gentlemen. Thank you for standing by and welcome to the Fourth Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. Today’s conference call is being recorded. I would now turn the call over to your hose, Mr. Tony Hung. Please go ahead, Tony.

Thank you, operator. Hello everyone, and welcome to Lexin’s Fourth Quarter and Full Year 2019 Earnings Conference Call. The company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and Chief Executive Officer; Mr. Craig Zeng, our Chief Financial Officer; Mr. Ryan Liu, our Chief Risk Officer; Mr. Stanley Zhou, our Senior Financial Director; and other members of our team. For today's agenda Mr. Xiao will provide an overview of our recent performance and highlights; Mr. Zeng will discuss our financial results; and Mr. Liu will discuss our credit performance. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call, as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. I’ll now turn the call over to our CEO, Mr. Xiao, whom I will translate for.

[Interpreted] Hello everyone! Thanks to our efforts in the past quarters, our new construction platform strategy is now entering a phase of increasing growth and we're able to record another quarter of strong growth, surpassing our raised guidance in the fourth quarter. For the full year 2019, Lexin's loan origination volume increased to over RMB100 billion, reaching a RMB126 billion, an increase of 90.6% year-on-year meeting our full year guidance. Our revenues surpassed RMB10 billion reaching RMB10.6 billion, an increase of 39.6% year-on-year. Gross profit was RMB5 billion, an increase of 65.8% and net income reached RMB2.3 billion, an increase of 16%. In the fourth quarter we originated RMB42.8 billion in loans, an increase of 104% year-on-year with revenues of RMB3.1 billion, an increase of 50.4%, gross profits of RMB1.5 billion, an increase of 59.7% and net income of RMB518 million. At the end of 2019 Lexin's outstanding loan balance reached RMB60.6 billion, an increase of 87% and our asset quality remains stable. [Interpreted] Our continued investment and deployment, our new consumption strategy. In 2019 we increased our spending in R&D. The total investment in R&D for the year reached RMB416 million, an increase of 29.9% and for the full year the marketing and sales fee increased to RMB1.5 billion, an increase of 161%. This strategy has allowed for our registered user numbers to surpass RMB70 million, an increase of 96.5% year-on-year. New active users were RMB2.1 million for the quarter, an increase of 244%, continuing two consecutive quarters of growth exceeding 200%. Growth in our user numbers will drive our future transaction scale and the continued growth of our revenues. [Interpreted] In 2019 Lexin’s new consumption platform strategies… [Technical Difficulty] In 2019 Lexin’s new consumption platform strategies, three core businesses, developed rapidly. Fenqile’s online e-commerce platforms SKUs grew to over RMB2 million and our full year GMV reached RMB8.1 billion, an increase of 38.7%, much stronger than 2019’s industry growth rate of 8%. Offline consumption scenarios also generated RMB20.6 billion in transactions as more and more supermarkets, convenience stores, leisure and restaurants and other retailers join our platform. Membership privilege cards and apps and working with leading online and offline players expanded to include privileges for numerous brands to cover leisure, apparel, dining, hospitality and more. At the end of the fourth quarter, Lexin’s playing membership product has already been utilized nearly 1.8 million times, membership points have opened up both online and offline membership point systems serving over 6.1 million customers. [Interpreted] Thanks to our strong technological base and highly stable and complained operations and strategy, Lexin’s has won the trust of many partners. To-date Lexin is cooperating with large scale banks, insurance companies, consumer finance company and has established partnerships with over 100 financial companies. In this period of rapid growth, we're also committed to our social responsibility. At the beginning of the year, Lexin donated RMB15 million to be used in the protection of frontline medical staff and the current ongoing effort against the current COVID 19 pandemic. [Interpreted] So our overall operations has been affected by the ongoing pandemic. Lexin has delayed the normal assumption of operations there and our loan servicing has been affected. As a result, we immediately adjusted our customer acquisition strategy and asset management strategy in order to ensure stable asset quality. To-date the company has taken many steps and actions that operations are now at 90% of normal. In the first quarter we expect loan originations to exceed RMB32 billion, an increase of over 60%. As the COVID 19 conditions in China are gradually contain and as the economy recovers and consumption normalizes, we believe that we can return to a rapid path of growth. We therefore feel that currently there is no need yet to adjust our full year guidance of RMB170 billion to RMB180 billion, and will make a determined effort to achieve this challenging goal. [Interpreted] Currently consumption is Chinese economy’s stabilizing agent and in the current environment new consumption and new infrastructure will become the Chinese economy's twin engines. The central government has also clearly expressed that restarting the economy and driving internal consumption will be integrated to drive new consumption and consumption upgrade. Under the new favorable and encouraging government policies, Lexin’s new construction platform strategy will gain greater room and traction, continuing to serve China's real economy, driving China's growth and consumption, providing benefits to millions in China's new consumption generation. We believe in steadfastly adhering to long term value generation, serving the new consumption generation and continuing to open up both online and offline consumption scenarios, as well as membership benefits and using points and financial technology to create a new consumption service ecosystem and consolidating our leadership with our customers. [Interpreted] Next, I’ll ask our CFO Craig to discuss our recent financial performance.

Thank you, Jay, and hello everyone. I'm pleased to announce that we have once again delivered strong results. In the interest of time, I will not go over line item of the financials. For a more detailed discussion of our fourth quarter and full year 2019 results, please refer to our earnings press release. Total operating revenue for the full year 2019 reached RMB10.6 billion, driven by strong growth in our financial service income, which reached RMB6.8 billion, of which loan facilitation and the service fees was RMB5.6 billion. Adjusted net income was RMB2.4 billion, reflecting our continuing strong growth and the performance. Fully diluted adjusted net income per ADS was RMB12.95. We continue to see the future potential of our business model. In the performance of our customer cohort whom we acquired in the first quarter of 2015, whose balance is now RMB13,639 and whose 30-day delinquency rate is approximately 1.1%, with a quartile active rate at 35.2%. On our operating leverage, operating expense as a percentage of the average loan balance was 5.2% for 2019 and the non-advertisement marketing, advertising, G&A and R&D was 1.2%, 2.2%, 0.9% and 0.9% of average loan balance respectively. We currently have 73.3 million registered users and 19.4 million customers with credit lines, up from 10.5 million in the December 31, 2018. We acquired nearly 2.1 million new active customers in the fourth quarter. Overall our average credit limit was RMB 9,700, while our average tenor is now 12 months. Our weighted average APR was 26.8%. In terms of our funding, for the quarter loan funding for new loan origination came from our Juzi Licai platform, and all of our funding for new loan origination came from our institution funding partners. The ongoing COVID 19 outbreak has brought and continuing to bring many challenges to our business, but we are now seeing a gradual recovery. We believe that with a gradual recovery and the determined efforts of our team, we may still be able to achieve our previously stated guidance for the year. We are also pleased to announce that we now expect a total loan origination for the first quarter 2020 to be over RMB32 billion. Next, Ryan will discuss our credit situation. Ryan, please.

Thank you, Craig. We continued our stable credit performance in the quarter. In-spite of a challenging condition in the market, our credit quality continues to be high and within expected levels and we fully expect our credit status to continue to perfume well and at expected levels. Our 90-day price delinquency ratio remains low at 1.56% and we continue to see strong credit performance as our lifetime charge-off ratio is approximately 3%. Due to the credit performance and to the number of new customers, as well as ongoing COVID 19 situation, we expect the vintage charge-off ratio to our loan portfolio to increase to approximately 3.5% to 4.5% over the course of the next few months before improving in the third quarter. This is fully within our range of expectations and we fully expect our stable credit performance to continue in 2020. With that, I conclude our prepared remarks. Operator, please proceed with the question-and-answer session.

Thank you so much presenters. [Operator Instructions]. Your first question comes from the line of Jacky Zuo from China Renaissance. Our line is now open Jacky.

Hi, good evening management. Maybe just for the interest of time I will just ask in English. So first question is about our first quarter guidance. I saw the first quarter guidance is actually stronger than our market expected. So just wondering if management can give us more color on the recent situation regarding the virus and how is the recovery in the recent weeks and also the contribution [ph] regarding the virus situation? And second question is about our take rates. I reserve states if we just use the loan facilitation fees divided by our loan originations, the take rate actually went down in Q4. Just wondering what is the reason behind? Is it because of our higher credit cost assumptions, which is our credit cost assumptions [inaudible]. And the third question is about our upcoming accounting change. So can you share some color about the impacts of probably acceleration of credit cost in the coming change of this. Thank you.

[Interpreted] So Jackie, with regards to the first quarter numbers and situation, well I mean obviously it's already the end of March, so you can say that we are probably more or less accomplished the numbers that we have given out for the first quarter. The operations right now, they're recovering pretty well. Overall it's coming back and it’s increasing daily as mentioned earlier. We are at 90% of our normal levels and our customer acquisition is also about back to normal and we're becoming increasingly confident. Now on the risk, on the collections as you know that we have a major collection center unfortunately at the epicenter of the pandemic. So the staff there had to work remotely, which unfortunately also meant that they were not as effective. But as I know they are definitely catching up. There is a bit of a backlog that is going to need sometime in order to achieve that. And for the second question, I think Craig would like to answer.

[Interpreted] So Jackie, on the takeaway though the overall probability, I think there's a couple important points that Craig wanted to make. One, because of the number of new customers who are testing, there are certain reductions that occurred from the early repayment. So what they would do is that they would discover our product, they will use our product, they would like the service and then they will repay early. So in turn that impacted the numbers a little bit. And as you know, since the third quarter and into the fourth quarter, we had on a quarterly basis 2 million new active customers each time. So the new customers definitely behaved differently than the matured customers and now that they are a larger proportion they have a bigger impact. And of course also the risk levels because they are new, they haven’t matured yet and are also high. And of course also on the overall probability, as you know we made many long term investments in the fourth quarter, whether it was in customer acquisition or other areas, and as you know from our model and our model involves growing with our customers, these are long term investments that would generate long term returns. Now in the future we’ll take additional steps to mitigate different things. Ryan may talk about a little bit of the steps on the risk side, but certainly one of the things we may be doing is that for the a newer customers, we might give them smaller lines, so that way that when they repay it will be a much more minimal amount, and we think that over time their behavior will return to being more normal. And on the third thing, the newSSL [ph] or the application, this of course would be industry wide. This is a SEC requirement and we’re certainly working very hard on getting 100% clarity on it. Once we have clarity on the exact impact, we’ll be sure to communicate that to everyone.

Our next question comes from the line of Lucy Li from Goldman Sachs. Your line is now open Lucy.

[Foreign Language] The first question is a follow-up on asset quality. Just wanted to clarify whether the changes in the vintage line or the changes in write-off assumptions will be also reflected on the fair value change line in the P&L. If so, shall we expect to see a huge negative number in 1Q given the worsening asset quality? And secondly is on the client factors. Do we observe any changes in client credit demand and related to that, how are we adjusting our clients’ acquisition strategy in the first half of the year? And lastly, just wondering how do you see the pure facilitation model and are we going to put on more emphasis to transitioning into such model. Thank you.

[Interpreted] So Lucy, I’m sure you understood all that. I think we had a little bit of a different situation with the new customers and this year certainly we're changing and there may be some one-time things of course that result from that. So certainly it’s not necessarily something that we expect to continue. [Interpreted] So Lucy with regards to your questions on the consumption, well it is fair to say that obviously the events in the first quarter has suppressed consumption in China significantly, effectively freezing all the offline consumption activities and clearly this is also reflected in our Q-on-Q numbers if you compare our first quarter guidance versus our fourth quarter numbers. Now, it's also fair to say that gradually the pandemic is being contained. We can see for example in Shenzhen [ph]. Pretty much all the offline venues are coming back or have come back already and this includes the impact of certain high risk areas if you will such as movies and otherwise. They are coming back and increasing the normal as well, and as we mentioned earlier, we're totally looking in terms of our daily operations of being back at around 90% or above. Now with regards to the customer acquisition, even before the ongoing pandemic, we already were adjusting our customer acquisition. Obviously the acquisition of customers online presents higher risks. We have to make certain adjustments, so ever since the second half of last year we've been reducing the approval rates, adjusting the model, but also continuing to make sure that we keep the customer acquisition costs stable and consistent with the numbers we’ve mentioned before at under RMB200 per customer. So overall we're looking at probably a stable situation when it comes to the customer acquisition. Now in terms of our overall situation as a result, because of the actions last year and because of the customer acquisition, we are not under pressure to acquire customers this year, so it could be more stable, and with the existing customers we should be basically within the range with a lot of effort of achieving our guidance on loan originations. Now on your third question on the asset light model, well for this year I think we're looking to increase that significantly, possibly by a factor of – or possibly by 1x. So basically it will be significantly higher in that respect as compared to last year. [Interpreted] And so Lucy, I want to clarify that it's definitely not 100 basis points, it’s more like 50 basis points, but this is the 50 basis points on top of the already anticipated increase and the increase again in the core biz would be because of the new customers. So you see some of these things in the fourth quarter that arises due to the new customers and this is just a matter of time and them going through the system and maturing. Now we did see certain challenging things occurring in the industry as a whole back in November, so since then we made adjustments, some of which Craig talked about. We adjusted our model, the approval rates in the same conditions, where that will come down and we're doing certainly adjusting for a longer term analysis and more distinguishing between our new and old customers. But certainly the credit quality or it's not – or the vintage charge-off is not increasing by that much. Okay operator, we’re done. Next question?

Your next question comes from the line of Sanjay Jain from Aletheia Capital. Your line is now open.

Hi everyone, can you hear me?

Yeah.

Congratulations on the good results. Three questions and allow me to ask them one by one. First is on asset quality and you know just reconciling the numbers. So in the delinquency, the vintage chart, I see the highest delinquency being 3.5% or close to that for the third quarter 2018 vintage, which would, I assume – you know I'm always confused about how you report the delinquency and how it translates into the loss rate. But suppose it translates into around 7% loss rate on the on-balance sheet, if I look at the fourth quarter provisioning divided by the average loan, it works out to 21%. How do you reconcile if it is 7% overall versus the 21% on the on-balance sheet?

[Interpreted] Yeah, so as Craig had mentioned, basically I think there's the on and off distinguishment. So when you look at the balance sheet and the amounts there, you can't necessarily get to the right numbers. Now on the delinquency, it's worth noting that there is a way to do it, but to note that its installment payment, so obviously you need to make certain adjustments. Given the fact that it is installment and there is a way in which you can then translate using the math, you get to the 3.5% and I think some of these things may just take a little bit of time to run-up. And I think Ryan might have something he also wants to add on this.

[Interpreted] So the 2018 Q3 vintage, it was definitely impacted by the events in the B2B sector there, but you can see that quickly in the subsequent quarters and thereafter that things have improved, so we certainly made some adjustments accordingly.

Okay, okay, my second question is on the recent customer behavior. When we spoke in February, you were saying that you are extending some relief to the customers who are calling for a deferment of the February installment. So if you can give us some numbers around that; how many or what percentage of customers called? Did you defer for all of them? Do they know that they have – you know that installment has been added to the end of the loan period, which means they have to pay? And as a follow-up kind of like, you know asking the same thing in a different way, what percentage of your customers are now at 80% or higher utilization and whether you have gone ahead and cut credit lines for any of the customers you identify as risky in the current environment?

[Interpreted] I think I might have missed some of Ryan’s numbers there, but in the first quarter we did see that there was increasing risk, so we actually tightened and made some adjustments and we distinguished between new customers and old customers. Some of the things that we did is we lowered some of the lines. So actually the total amount of credit lines we lowered was probably the equivalent of something like RMB 2.1 billion if I got my numbers right, and we do see actually now there are improving credit conditions, but certainly again, we know that based on the behavior of some of the customers that we may need to make some adjustments and we certainly did that in the first quarter actually. [Interpreted] So what Ryan said was actually the – and I suppose this is the way that we would look at the numbers. In terms of the number of customers that would enter the arena where the collections team would need to start contacting them and pursuing collections, it's only increased by about 10%. So it hasn't actually increased significantly and we do see that it's coming back and coming down. Now, for very specific locations like Hubei, the epicenter, which is also about 6% of our portfolio, obviously we need to be even more careful about it and then of course the numbers there can be worse. But overall there hasn't really been that significant a change in terms of how we look at it, maybe only about 10% or so.

Okay, thank you. And my third and last question is on the CB’s. Do you have a put option on your CB as well and where is the cash? Is it still sitting overseas and where do you plan to use it?

You mean do we have the right to call the CB? [Cross Talk]

Yeah, with the coming year its four years. We have four years of the production.

Yeah, they can put to us. We can't you know – we can't get it if you will, but they can put it to us after a few years.

So is it 2023, is that correct?

It should be what, year four, so yeah 2023, we’ll have the right to put it to that span.

Okay, and the cash is still sitting overseas?

Not sure.

[Interpreted] Only a portion, only a portion.

Okay, you don't plan to use it at least temporarily for on-balance sheet lending or something?

No.

Okay, okay, thank you very much.

Your next question comes from the line of Alex Ye from UBS. Your line is now open Alex.

So I have a couple of follow-up questions. First one is on the take rate outlook for the next couple of quarters. Can you give us some color on work with any of the positive drivers and what’s in the [inaudible]. And secondly, could you give us some updates on the progress of your implication for consumer finance license? And lastly on the customer acquisition strategy, giving your probably going to take a more cautious approach on online traffic customer acquisition, so which would be the other customer acquisition options that you will be more focused on this year. Thanks.

[Interpreted] So Alex, on the take rate, as you know there’s various components to that; our pricing or APR, our cost to capital, our level of risk and then maybe some other costs. In terms of our pricing or APR, that's currently about the same, but in the future it might come down a little bit. In terms of our financing cost, as the team mentioned earlier, it might drop just a bit in the near future. Finally on the risk, well it's definitely going higher right now, but we do also see that it's getting better; it's recovering a bit, so it'll probably normalize sometime in the future. [Interpreted] So Alex, on the customer acquisition, this year we're probably looking at stable customer acquisition process or stable growth. In general there probably wouldn't be too many changes, but well certainly as mentioned earlier and this is actually an extension of things that occurred last year. As mentioned earlier, we’ll control the higher risk channels, we’ll control basically what we do on those channels and of course those channels tend to be the online channels. On the offline side, historically this has been a very stable channel with very good asset quality and we will probably continue to do more on it and focus a bit more on it this year, and of course also now as we are growing in strength in terms of our brand, we have increasing natural traffic and also our e-commerce brand is getting greater recognition, so we'll probably get additional grow from that as well. So overall we're probably looking at a situation of stable growth, certainly stable per customer cost, consistent with what we said before, and given the growth that we've done last year, basically we're in a position where we know that this year that will lead to better operations and certainly some better numbers and as a result we don't need to focus as much on customer acquisitions this year. Now, on your second question on the consumer finance license, well basically there's certainly no new news at this time that we can give, but the minute that we hear something, we’ll be certain to make sure that everybody is aware of it.

Your next question comes from the line of John Cai. Your line is now open John.

[Interpreted] So I have three questions. The first one is on the exposures of those relatively harmless customers that we acquire online. I just wonder, in terms of the outstanding balance and outstanding customer, what portion are they accounted for as a percentage of the whole portfolio? And the second question is about the tender, because we also mentioned that in the fourth quarter the tender declined quarter-on-quarter due to some of [inaudible] behavior done by these new customers, and because in this year we expect those new customers acquired last year will contribute an increase in volume, I just wonder if that put structural pressures or downward trend on the tender structurally this year. And the third question is about risk and cohesion. As Ryan just mentioned, that long stand needs to be collected. That ratio has already stabilized. Just wondering what's the recovery rate of the collision efficiencies of the other way; how is the trend currently? And then in terms of the research, I look at the liability, the guarantee liability on balance sheet and that accounted for around 3% of off-balance sheet loan and 2x of our 90 days delinquency. Just wondering if that's a proper understanding of our current use of capital? Thank you very much.

[Interpreted] Yeah, sure. So John on the customers, well we don't quite disclose it, but we disclose new active customers. So obviously you know the new active customers, you know the active customers, you know the loan originations, so you get a good sense of what's happening. Now in terms of loan balance, obviously we don’t disclose that, but obviously again new customers would have a loan amount, so you can get an idea. It is also worth pointing out that while we talked about it in a certain way earlier, the new customers may not necessarily be a high risk, but just need time to develop. And of course the channels that we have, they can probably now provide at least 1 million in terms of new customers a quarter. On the guarantees, I think you can't calculate it that way, but in the future maybe we’ll arrange a time for you to discuss with Stanley on how to get to the numbers. A – Craig Zeng : [Interpreted] Yeah, so on the early repayment I think we’ve taken steps and we do some of the credit and also made other limits. So it’s something that we think that will very quickly return to more normal levels.

[Interpreted] So, yeah John as mentioned earlier, the amount of people entering delinquency in which our collections team has increased by 10%, but in terms of the people coming out, it’s basically 2% to 2.5% or so behind the normal levels, but even there we can see that its returning gradually to normal. So hence there is a positive trend there. Yeah, operator?

Your final question comes from the line of Daphne Poon with Citi. Your line is now open Daphne.

Hi management! Thanks for taking my question. So just to quick…

Oh Daphne, if you want you can ask the question in Chinese and then just translate.

[Foreign Language] So the first question is about the take away outlook. Just want to confirm whether that has taken into the consideration of the new accounting policy, this easier model and whether that will – which will lower this thing about take rate compared to the previous year’s level. And the second question is regarding our current approval rate. Just want to get a sense of the magnitude, like how much you have now versus our normal level. And the last question is about the asset light model, whether we see the change in the attitude from a financial institution patterns that with driving with across that whether they are preparing to switch back to the guaranteed model. Thanks.

[Interpreted] Okay, so Daphne, on the take rate, we talk about it and obviously the fourth quarter numbers are still on the old standard, so hence when we talk about these things it’s still very much on the old standard. On the impact from CECL itself, right now it looks like ultimately it’s just a bit of a timing issue. Ultimately we will make the same amount of money and the CECL is just basically making a more conservative and distances that more of the things will occur at the front and there will be less income recognized upfront. But that will be made up for more income being recognized towards the end of the life’s loan. So actually over time it’s – essentially its exactly the same, it’s just a timing issue. So obviously we have on-line and off-line teams, but the off-line team is off-line right now, so it’s just online and hence right now getting straight to you the answer, it’s probably down 20% in terms of the approval rate for on-line. So maybe a little bit surprising to hear, but as Jay mentioned what has been the impact of the COVID 19 and the pandemic, the institutional side for us, it’s actually been limited impact or no impact or actually kind of a positive impact in fact, because there is now lot of macro policies, because the macro policies are pushing the financial firms to support the real economy and as a result all the financial institutions have plenty of cash to deploy and limited places to deploy them. So clearly we see now that our assets are not enough to meet all the demands from our funding partners and this in turns has allowed us to gain benefit, whether it’s on the leverage or guarantees, we are getting too terms. So for example for certain new financial institutions that we work with, they no longer acquire deposits or security guarantees. With regards to whether some folks will maybe call a no guarantee or may – or an open platform we do see that in general the bigger banks, they are slower to adopt this, therefore consumer finance companies and smaller intuitions, they are very, very welcoming to the model. And as Jay mentioned earlier, we are definitely looking to increase this significantly this year to be maybe something like one-time rather doubling what we had in terms of the amount last year. Hope that answers your question. Operator?

There are no questions at this time. Presenters you may continue.

Okay, I think then we can conclude the call.

Thank you ladies and gentlemen. That does conclude the conference call for today. Thank you for participating. You may now disconnect.