Yiren Digital Ltd. (YRD) Q2 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Yirendai Limited Second Quarter 2017 Earnings Conference call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Matthew Li, Director of Investor Relations. Please go ahead sir.

Thank you, operator and welcome to Yirendai's second quarter 2017 earnings conference call. Today's call features presentations by our CEO, Ms. Yihan Fang, and our CFO, Mr. Dennis Cong, Mr. Yang Cao, our COO and CTO, Ms. [indiscernible] our VP of Finance will join the presenters in the Q&A session. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe-Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that may cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yirendai's filings with the US Securities and Exchange Commission. Yirendai does not undertake any obligation to update any forward-looking statement, except as required under applicable law. During this call, we will be referring to several non-GAAP financial measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and a reconciliation to GAAP measures, please refer to our earnings press release. With that, I will turn the call over to our CEO. Yihan, please begin.

Thanks, Matthew, and thank you all for joining the call today. We're pleased to deliver another strong quarter with loan origination growing by 80% from the same quarter of prior year RMB 8.2 billion. This brings our accumulative loan origination volume as of June 30, 2017 to RMB 47 billion and outstanding loan balance to RMB 28 billion. In Q2 2017, we facilitated loans to 139,000 qualified borrowers, 71% of these borrowers who are acquired from online channels representing 51.2% of our loan volume. Online volume growth this quarter is 129% year-over-year, nearly a 100% of the online loan volume was facilitated through mobile. And as of end of Q2, we had accumulatively served 744,000 qualified borrowers with cumulative registered borrowers up 33.5 million. The strong growth from online channels was mainly driven by our continued focus on technological innovation in areas including programmatic online marketing have an opposition and conversion efficiency, status quality and automatic anti-fraud system. Despite of continuing the growth of loan volume, the risk performance of loan portfolio has remained very stable. This quarter, we launched a new risk grid based on our proprietary credit scoring system, the Yiren score; it aims of delivering more precise and accurate categorization of our borrowers' credit profile. We have and will continue to invest heavily in our technology, data, [NAI] [ph] to drive our operational efficiency and the risk management capability. We continue to focus on product innovation. In Q2 2017, about 5% of our borrowings were repeating borrowers from the Top-up Loan product. In addition, based on initial testing involves our insurance deposit based products have shown well stable performance. We expect to open this product to all of our customers in the near future. In addition, our cost in provident fund based product has been widely we see it in the market and it has helped us acquire many customers with high credit quality. This product has recently reached the RMB 100 million origination monthly milestone. In the second half of the year, we planned to launch new products that are based on China's Central Security Data. Our commitment to continue as a product innovation as helped us improve customer satisfaction as well as maintaining our leading position in the online lending industry in China. Moving on to wealth management, we served close to 200,000 investors during this quarter. All these investors, invested through our online channel and 90% of the lead involves mobile app. And as of end of Q2 2017, we have accumulatively served about 1.1 million customers, recognized users is about 5.6 million. In Q2, average investment term while being product remains healthy and it amounts with an average annualized return of 7.9%. In addition, AUM per investor continued to increase to RMB 103,000 in Q2. Mobile DAU in March 2017 was approximately 318,000. We aim to build Yi Ren Wealth into a leading online wealth management platform in China that serves the growing mass-affluent population with investable assets of over RMB 600,000. The increased customer seeking with our platform, we are confidently doing our product mix, as well as our apps features and tools to ensure we can suit our investors with averaging demands. In the future, we planned to provide asset allocation services to our customers, so we are incrementing KYC measures and the leveraging credit yield throughout wealth management's product portfolio. Our new platform business, which is conducted through Yirendai enabling platform while YEP that we launched in March of this year as shown fairly accelerating growth. We have established a close partnership with several industry stakeholders on data collection and as brought customer acquisition and have already seeing spending revolver. We'll continue to work with qualified partner company to help grow our platform business and at the same time optimize industry's efficiency and the customer experience. For the rest of the year, we will execute our key strategy as discussed above. Furthermore, we will also continue to work closely with regulators to ensure our full compliance status with online lending industry guidelines. I'm very excited with the progress we have achieved to-date. We have been ranked number one three months in a row [indiscernible] in their online lending platform development index, which further solidifies our leading position in the think-tank landscape in China. I'll now hand the call over to our CFO, Dennis to discuss our Q2 2017 financial results.

Thanks Yihan. Hello everyone, I will first go over our second quarter 2017 financial results, followed by our guidance for next year and our updated guidance for fiscal year 2017. We again delivered solid results for the past quarter with strong loan origination volume and top-line growth. Q2 2017 total net revenue and guidance were approximately 10%, increasing 61% from previous year to RMB 1.2 billion. With the corresponding revenue take rate of 14.4%. The strong revenue growth was mainly due to growth of loan origination volume especially been online channel as well as increased the service fees billed to investors and monthly fees billed to borrowers. As our remaining loan balance continue to expand. It was partially offset by the impact of deferring revenue recognition nature of the loans facilitated from online channels, and monthly fee collection loans which has a fee collection schedule with monthly payments, in addition to a portion paid upfront. Driven mainly by loan volume and investor AUM growth, we billed fees of RMB 1.9billion to borrowers and the investors in Q2 2017, an increase of 68% from previous year. Our take rate of fees billed was 23% in Q2 2017 similar to the previous quarter and compared to 24% in Q2 2016. Turning to operating expenses, sales and marketing expenses were RMB 618 million for the quarter or 7.5% loan facilitation volume compared to a seasonally low 6.8% in previous quarter and 7.8% in the previous year. The decrease in sales and marketing expense as a percentage of loan volume on year-over-year basis was mainly due to the improvement of our acquisition increases from online channels. Origination and servicing costs were RMB 93.1 million for the quarter or 1.1% of loan volume increased from 0.8% in the previous quarter. Origination and servicing costs increased due to our intent effort in loan collection activities this quarter. Our G&A expense were RMB 99 million for the quarter or 8.3% of total net revenue compared to 9.8% in the previous quarter. The decrease in G&A expenses to tentative total net revenue was primarily attributable to the improved operational efficiency and leverage, despite our increased level investment in technology development, artificial intelligence and machine learning capability. In terms of profitability, we achieved an adjusted EBITDA margin of 32% compared to 39% in the pervious quarter and 36% in the same year throughout 2016. Net income in Q2 2017 was RMB 269 million, an increase of 3% from the same period last year. Excluding the one-time withholding cash for special cash dividend, the GAAP net income in Q2 2017 was RMB 329 million, an increase of 26% from the same period last year. On the risk management front, we continue to maintain solid anti-fraud and credit underwriting profit and closely monitor risk performance of our loan portfolio. As 2015 and 2016, vintage loans continue to mature; the risk performance of our loans is consistent with our expectation, as demonstrated by the stable delinquency rate and a consistent vintage charge-off performance of our loan portfolio. The current total charge-offs of our 2015 vintage loans with reducing balance are standing at 8.3%, a good indication of asset quality as well as loan performance. As a leading think-tank company in China, we strive to uphold industry best practice for all assets of our business. We are pleased to see the continuous programs making refining our credit scoring model to deliver more precise and accurate credit assessment of loan applicants. Under the new Yiren Score credit scoring system starting May 1, 2017, we will adopt an upgraded risk grid system with five segments to more accurately categorize the risk profile of a borrowing. Similar to FICO score, the new system has a score range from 300 to 900 that correspondent to the credit quality of a borrower. Through our benchmark testing, our Yiren score has a good correlation to FICO score in terms of expecting net charge-off rates and actual absorb result for each of these score ranges. For example, Yiren score of 700 borrowers' credit performance driven resembles that of a FICO score 700 customer in the U.S. market. The current volume adjusted average Yiren score of our loan portfolio is rough 710, again, another strong indication of the fine nature of a borrower base and loan portfolio. In aims to further enhance our cash management and to better match our services with the cash position associated with the quality assurance program, we have revised the cash contribution through this program effectively July 1, 2017. The company will contribute 30% of the transaction fee collected from the borrowers following the actual decollection schedule over the life of the loan to a restricted bank account as a quality assurance service fee. The total contribution of the life of a loan approximately equal to 8% of the loan contact amount was the same to the current quality assurance program liability accrual ratio. These amendments of cash contribution rules definitely change the protection level with provided fee investors, but rather to better match the contribution schedule with the cash collection from the business and enable us to generate higher returns on cash. On cash flow and balance sheet side, we continue to enjoy strong cash flow from operation and to maintain solid cash position. During this quarter, we generate net cash of RMB 530 million from operating activity. As of June 30, 2017, our cash and cash equivalents were RMB 891 million balance of held-to-mature investment were RMB 589 million and balance of available-for-sale investment were RMB 1.3 billion. As of Q2 2017, we had RMB 1.7 billion of restricted cash in our quality assurance program and [cash] [ph] accounts. We also booked RMB 270 million in loans at fair value because of consolidated ADS. Our liabilities were mainly comprised of RMB 2 billion in liabilities from the quality assurance program. Considering our current large cash position and project a strong cash flow generating capability to include our shareholders return, our Board of Directors have approved a special cash dividend in the amount of U.S.$1.50 per ADS, which is equivalent to 30% of accumulated net income through the fiscal year 2015 for the first half of 2017. In addition, our Board of Directors also approved a semi-annual dividend policy, under this policy semi-annual dividends will be set at an amount equivalent to approximately 15% of company's anticipated net income after-tax in each half-year commencing from the second half of 2017. We continue to see strong growth trajectory of our online credit and wealth management business and investor proactively in building our technology capability and establish new product development program, however, given our capital efficient marketplace business model and strong technology driven cash generation operation. We believe the dividend pay out policy to our shareholder demonstrate how prudent and responsible corporate finance management practice. With that, let me go over to our guidance. For the quarter of 2017, for the third quarter of 2017, we expect loan origination volumes to be in the range of RMB 10 billion to RMB 10.5 billion. Total net revenue to be in the range of RMB 1.3 billion to RMB 1.35 billion and adjusted EBITDA to be in the range of RMB 280 million to RMB 320 million. At the same time based on our strong performance in the first half of this year and expectation of the second half we'd like to revise our guidance for full year 2017. We expect loan origination volume to be in the range of RMB 35 million to RMB 37 million, an increase of approximately 6% from our previous guidance. Total net revenue to be in the range of RMB 4.8 billion to RMB 5 billion, an increase of approximately 10% from our previous guidance. Adjusted EBITDA to be in the range of RMB 1.3 billion to RMB 1.4 billion. That concludes my remarks and I'd now like to turn the floor back to operator for the Q&A session.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Richard Xu of Morgan Stanley. Please go ahead.

Thank you for management for giving the opportunity for the first question. Two questions for me, one is, I don't know if there is any impact on the strategy so far from the rising interest environment in China in relative to investor -- cash incentive increased a little bit in the second quarter, does it mean you are going to change a little bit of strategy on the investor acquisition front? And secondly is, on the regulatory front, certainly the regulators have been -- tighten the regulatory standards for the whole financial services sector including syntax, what's the impact on Yirendai, are we seeing competitors I guess decrease in competition a little bit, where more exit of some of the smaller platforms, from that perspective what does it mean for our investor in borrower acquisition? Thank you.

Hi, Richard. This is Yihan. Thank you for the question. In the second quarter our cash incentives were a little bit higher because we wanted to build a bigger interface from individual investors because we are planning to grow our wealth management business into a more general a level compliant management platform. So, we really put effort towards the most affluent audience and with its various test to do more trusted sourcing of our most affluent customers. And going forward, not only we're trying to acquire more most affluent customers, we will also diversify our funding insurance bids to be prepared to any situation, for example, the [insured] [ph] rate change in the banking industry, so we will introduce institutions from being like trust and a bank and as well as developing our individual investor space.

Yes. And also let me add to Yihan's answer. In general actually because most of the investor individual actually were less than the recent interest rate rise in the China institution market are actually annualized returns due to that 7.5%. So, I think that advantage that we have an institution -- investor base -- individual investor regional base that compare to some of other probably maybe more sensitive to the institutional capitals. But, still as I mentioned longer term and strategic view of our -- we still have a diversified source of volumes we have more balance in terms of anticipating any potential micro shock or liquidity issues. Follow-up on the next two questions, first regarding the regulation, the tighten down on the industry risk. I think it's definitely a good thing for us as we have demonstrated from our recent year score. Our asset quality performance has been outstanding. And we believe with the better tightening of the overall financial industry we're actually going to see much more healthy risk environment within the financial industry. And the next question regarding the competition among the P2P platform, I think with the implementation new lending guidance from the CBRC. There are many second tier and third tier and some even larger platform are starting to exit the industry as you see in the market news. And then also, as we have already indicated early on as the industry leader, we will enjoy the benefits of the more well regulated demand going forward.

Thank you.

Our next question will come from Ella Ji of China Renaissance. Please go ahead with your question.

Thank you and congratulations on strong quarter. So, my first question is relating to the average loan size and average borrower investor side, so, if our calculation is correct, the average loan size for each borrower, it has been declining in the past few quarters. But, this quarter this average size goes up. And the contrary for each investor the average loan size has been going up in the past few quarters, but this quarter is the first quarter that it goes down sequentially. I just wonder if management can provide some color behind this [returning of the turn] [ph]. Thank you very much.

I think I will answer the first average loan size. I think as we continue to optimize our risk models especially with the new scoring system, we were able to optimize the loan approval rate for our best quality borrower base. What means that not only we're enhancing our approval rate for the overall by risk performance of the borrower, we actually needing a higher loan to the better quality borrowers. So, in general you will see turning up of the average loan size, but also the overall loan performance is actually improving.

Yes. Ella regarding to the investor loan size, we have to manage our AUM, our assets under management for investor, learning from current investor that's one of our KPIs for investor. And I'm positive that each quarter is increasing and this quarter the average AUM per investor has reached 103,000, last quarter certainly lower than 100,000. And this proves that we target more accurate [rate] [ph] higher policy investors or investors have more trust in our platform and add more funds in their account or combination of both.

Thank you. So, as a follow-up, so we have discussed that the overall the liquidity on China's finance market seems to tightening. In the meanwhile, the regulatory environment for the whole P2P market seems also to be tightening which we think may force out, shake out some under performance. So, with these two things consider, I just wonder what's management's expectation for both borrower and the investor acquisition cost going forward. So, on the one side, the whole liquidity going down, you may make it more difficult for you to find investor. But, in the meanwhile small players sporting out of market may give you more opportunity for market share consolidation. So, just wanted management talk about these two things, how that's going to affect your business? Thank you.

Yes. I think as a regulation implementation, I saw the recent overall the government direction of controlling the financial risk in the financial sector. We actually see -- we are going to benefit [indiscernible]. Basically you can already see that from our recent Q3 performance to our 2017 guidance. We actually see less competition and better customer demand enjoying better experience as we actually revise our business guidance. We are in -- still complaint already with the CBRC online lending guidance. That's a very clear indication of our unique position in the market. The current tightening of the regulation is actually putting a lot of less competitive for other non-performing platform of the market that were actually serve as in terms of the overall borrower acquisition. And also we believe as the leading qualifier, we are in compliant platform in China will enjoy a very special market position and brand in terms of attracting the investor side of customers. Yirendai's asset quality is very outstanding as we have seen from the steady recent performance and the good return we generate from our investors. We believe we will standout even more through this regulation tightening process to become -- to strengthening our market leader position going forward.

Thank you very much.

Our next question will come from Eric Wen of Blue Lotus. Please go ahead with your question.

Hi. Thanks management for taking my questions. And congratulations on the strong quarter and guidance. I have two questions, one is there has been several competitors offering with different loan size duration and target customers. What is company's view on those size, especially on pay day loans market and whether we intend to pursue this market? And my second question is regarding the dividend, can you elaborate on the thought process of initialing this dividend policy and why the management decide to return the cash back to the investor? Thanks.

Eric, I will take the first one. Was other segmentation, Yirendai is clearly positioned to target urban center worker with loan size offer like 50,000 to 60,000 total loan, which helps like life events consumer needs. And there have been many new companies that serve very small and very short durations and currently we don't have plans to enter that phase. We think that's totally different segmentation and the new impact expertise and we think, our best maximum opportunity is still the largest size online loan product.

Yes. And also I think add to that all our customer actually credit card holders. We believe the type of platform that you mentioned, we provide shorter duration small amount loans to consumers who mostly don't have a credit card. This is basically serving and revolving back to them that's not the key market number, we serve them. However, as we have accumulated reserve close to a million borrower base with such a high quality prime consumer base. We will plan to initiate some of our new product other than larger ticket size, longer durations. We potentially provide shorter duration and smaller size financing to them to meet their other shorter term consumer needs. So, we will expand into this type of market, but in terms of the market -- customer segmentation we'll continue to remain focused on our core prime credit card holder consumer base. In terms of the dividend policy, as you probably can see that our current cash balance in combining all the investment and all the self maturities balance together, we probably have about 2.7 billion capital debt on our balance sheet and we'll continue to enjoy 600 million or 700 million quarterly solid cash flow. With our current unique capital executing model, we even we have been very actively invested in our technology capability, we are a technology driven platform that is we do not need a significant working capital to run our business. We are also actively looking for potential strategic directions. We are considering all these options even with that we believe a prudent, a dividend policy we have set up now about RMB 600 million one-time dividend about 15% semi-annual based dividend paying policy will still leave us enough, more than enough capital to drive our strategic growth.

Thank you very much.

Our next question will come from Ryan Roberts of MCM Partners. Please go ahead.

Good evening management. And thank you for taking my question and I had to add my congratulations on a strong quarter and nice guidance. My question is kind of quick, just on the origination servicing cost, it's a very small item, you mentioned that the despite up tick was due to increased efforts to loan collection in the quarter. Just wondering if you can kind of give us some more color on and what the background is?

Hi Ryan thanks for the question, so it Yihan. The efforts we put to enhance the collection procedure is mainly on the pre-collection procedure that's before the loan gets to the payment base. We remind the borrowers to pay to repay the loan and also for the loan delinquent for less than 30 days we enhance the collection procedures as well including loan cost and the home visit.

Got you. Okay, thank you. If I could just ask kind of just a follow-up on the early question, with respect to your diversification kind of in the product portfolio, the long portfolio you mentioned potentially considering more kind of revolving consumption kind of credit, I'm just kind of curious what management thoughts are on when that, when that might become more of an interesting factor for us?

Ryan, actually we are actively exploring revolving and actually smaller loan size to give a better customer experience and actually we are partnering with some leading platform operating line like and revolving products, which will be rolled out this year. But the size of the line would be, might be smaller than the currency term loans, but that's not near the PD loan those categories.

Yes. In terms of business volume wise it would still be small this year, probably well its grossing to a meaningful percentage in 2018.

Thanks. Okay. I appreciate it.

Our next question will come from [indiscernible] of CICC. Please go ahead with your question.

Good evening and thanks for taking my question. My question is about the guidance of the adjusted EBITDA, will notice a sequential drop in the guidance of this number in the third quarter. Could you help explain the main reason for the potential decline? Thanks.

Yes. For the dropping of the adjusted EBITDA for the fourth quarter, its mainly impacted by the new product we introduced in Q2 that's a monthly product with a fee collection schedule, with a collection schedule featured by a monthly collection. So, in this product currently we are the main cause, main portfolio we, the fee collection schedule is either 100% upfront or like around 40% to 50% upfront collection and with the monthly fee collection schedule and this new product is actually with a very small portion of upfront fee and the majority of the fee is collected on a monthly basis throughout the loan lifetime. And our revenue recognition is actually following the cash collecting schedule. So in the first month or in a short term we'll inactively impact our EBITDA margin.

Yes. I think it's a product mix, up our online product that's what the new monthly collection fee loan products, as we had it before, we'd like to have a long term EBITDA margin around 25%. I think that will be a good benchmark that you can use to look at our business going forward, as our loan volume continue to grow, I think in a very strong trajectory particularly our online channels, its growing very strong. We believe if you keep the 25% EBITDA margin you will be able to see our need for long term growth in terms of earnings and the profitability. I think I would suggest investors to look at our business that way. These are deferred revenue nature, because the fee collection schedules, but the product can be even more profitable on uniquely normal basis.

Thanks very much.

[Operator Instructions] Ladies and gentlemen, this will conclude our question-and-answer session and also conclude the Yirendai Limited Second Quarter 2017 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect your lines.

Operator?

Yes sir. Yes sir.

Call concluded, yet? That's okay. Don't worry.

Okay.

Thank you.

Thank you for attending today's presentation. Have a nice day.