Yiren Digital Ltd. (YRD) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Yiren Digital Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. And after the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your first speaker today, Mr. Lydia Yu. Please go ahead, ma'am.

Thank you. Today's call features a presentation by the Founder, Chairman and CEO of CreditEase and our CEO, Mr. Ning Tang; our SVP, Ms. Mei Zhou; and our CFO, Ms. Na Mei. Before we begin, 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 Act of 1995. Such statements are subject to risks, uncertainties and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in the company's filings with the US Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements as required under applicable law. During the call, we will be referring to several non-GAAP financial measures and 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 financial information prepared and presented in accordance with US GAAP. For information about these non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I'll now pass on to Ning for opening remarks.

Thank you all for joining us today. We are very pleased to deliver another solid quarter with continued improvement in profitability and increasingly diversified revenue mix as we further navigate Yiren Digital to become a leading user-centric personal financial management platform. As we continue to strengthen our competitive edge and drive up our business scale, we have developed sophisticated strategies for both our wealth management and the credit businesses. For wealth management, we are further differentiating ourselves by upgrading our services and enriching our product offerings. For example, in the second quarter, we started to offer retirement plans and services, partnering with the leading global investment management company, Principal, which received immediate popularity since launch. And as we further dive into the retirement financial market, our new products and services will help enhance our customers' LTV. Moreover, we are enhancing our capabilities to serve customers with higher investable assets and the number of users who invested more than RMB 0.5 million in one single transaction on our platform this quarter increased by 126% compared this last quarter. Meanwhile, for our credit business, we are focusing on high quality growth and continue to take a proactive approach to transition our target borrower segment into higher credit quality borrowers, paving the way for the launch of our increasingly diversified products in the future. Secondly, we are deepening our deployment in small business markets in the second half of 2021 and will further diversify product mix by increasing SME loans. Last, but not least, as the user-centric financial management platform, we are making continued efforts to integrate our different business lines and service scenarios, addressing the comprehensive financial needs of each customer. For example, we are offering suitable insurance products to our borrowers to better protect them and their families, which Mei will talk about later. Through the strategies and moves mentioned above, we believe that Yiren Digital is well positioned to expand its business as the leading personal financial management platform. Now, I will provide a business update on our wealth management side before passing over to Mei to give an update on our credit business. Our wealth management business continues to see visible growth this quarter. Client assets for investment products reached RMB 14.7 billion as of June 30, 2021, representing an increase of 37% quarter-over-quarter. Total number of active investors stood at 386,000 as of June 30, 2021, representing an increase of 26% from last quarter. Meanwhile, the average client asset per investor further increased by 17% quarter-over-quarter to close to RMB 100,000. And the number of investors who held more than two asset classes on our Yiren wealth platform grew by 420% from prior year, reflecting a concrete improvement in our customers' overall LTV. On investor acquisition, we continue to invest in our brand to increase recognition and customer engagement. On May 28, our live anniversary program was joined by 20% of our active investors, which is a vivid reflection of our high customer engagement and loyalty. It's worth mentioning that our fund products became one of the key growth drivers this quarter. Specifically, our retirement fund of fund products enjoyed an immediate success right after its launch in June, which contributed RMB 23 million transaction volume in just 23 days. Moreover, our recently launched new version of [indiscernible] portfolio products that offer more flexible target returns. We're also well received among investors, with sales volume increasing by 80% compared with last quarter. Next to our insurance business. Hexiang Insurance Brokers, the business growth remained strong. In the second quarter of 2021, total premiums were approximately RMB 570 million, up more than 130% quarter-over-quarter. For Hexiang, we are focused on growing through our closed loop 2B 2C strategy in which post serving our corporate clients and fulfilling their insurance needs, we then leverage our insurance tech capabilities and provide customized and targeted insurance products to their clients and customers, transitioning our corporate customers into partner channels, helping them unlock a completely new revenue stream, and at the same time finding new customers with unmet insurance needs. Lastly, our digital stock brokerage platform, China Glory Securities, was officially launched this quarter, which is a meaningful milestone for us to establish a full spectrum wealth management product mix and to bring strong synergies into our wealth management ecosystem. The platform targets both mass affluent and high net worth customers segment. And apparently, we offer both Hong Kong and the US stocks, ETF and REITs, with more services and products to hit the shelves soon. Meanwhile, we believe that investing in investor education is core to drive business growth. That's why we have created a variety of educational contents with something suitable for investors at each stage of their investing journey, including daily and weekly live stream sessions to review market performance, as well as trending topics and daily financial news. On customer acquisition, in addition to strong support from our wealth management ecosystem, we're also focusing on 2B 2C strategy with over 10 partner channels already in our pipeline. With that, I will now turn the call over to Mei who will highlight key updates for our credit business this quarter.

Thanks, Ning. This is Mei Zhou. Hello, everyone. Now, before I go through the operational highlights of our credit business, I would like to share our response to the recent regulatory development and to echo Ning just mentioned about our initiative in credit business strategies. As of July, a window guidance came out from the local financial regulatory requiring the financial institution to cap the APR of the customer loans at 24%. We think that is a potential new requirement beneficial for the industry as it completely eliminates the market's [indiscernible] concern over APR and pricing. In response, since the last year, we have transitioned our target customer segment to higher credit quality borrowers through implementing targeted credit products, including APR 18% to 24% as well as interest-free loan products. In addition to local government's focus on supporting small and micro business, starting from the second half of this year, we will further expand our SME segment to better promote inclusive finance. Historically, we have been serving small business owner for years and have accumulated great experience and expertise in product design, customer acquisition and servicing. Coupled with our strong technology capabilities and efficient channel partners, we expect to see the meaningful growth in this segment. Now, I will provide an update on our credit business for this quarter. We saw a stable business growth in the second quarter as we are making strategic transition aimed at regulatory change, low volume and low facilities [ph] model in the second quarter [indiscernible] at RMB 5.3 billion, representing an increase of 7% from last quarter of 245% from the same period last year. Total number of the borrowers served in the second quarter reached more than 434,000, an increase of 25% quarter-over-quarter or 304% year-on-year. Meanwhile, our products' unit economics continue to improve as we enhance our operating efficiency. We continue to see declining trends in our acquisition costs as our repeat borrowing rates increase and as our product and service offering broadens. Moreover, we have seen the visible progress in cross selling insurance product to our borrower base. Total premium contributed by borrowers in the second quarter saw a 55% increase compared with the last quarter and the demand remains strong. [indiscernible] to our positioning as a user-centric personal financial management platform, we provide customized services by users, not by loan, which means that we value each of our customer's comprehensive demand for financial services and dramatically [indiscernible] their different needs and to serve them accordingly, enhancing our customers' LTV. On funding side, we continue to focus on expanding our funding partners and we received additional RMB 10 billion in credit line this quarter, with another 20 financial institutions in our pipeline. Lastly, on risk performance, we have seen stable and improving asset quality. As of the June, the delinquency rates for loan originated that are past due for 15 to 29 days, 30 to 59 days, and 60 to 89 days were 0.5%, 0.8% and 0.7% respectively, remaining at our historical lowest level. As we continue to upgrade our customer segment, we expect our asset quality continue to improve throughout the year. With that, I will now pass it to our CFO, Na, who will provide this quarter's financial update.

Okay. Thank you, Mei. Hello, everyone. For financial update, I will focus on key items of business operation and financial performance only. You can now refer to the detailed financial results in our earning release and IR deck that has been posted on our website. Firstly on our operating highlights. For our wealth management business, as of June 30, 2021, we have cumulatively served 2.5 million investors and the number of active investors this quarter continued to grow to 385,536, increased by 26% from last quarter. Client assets investment products climbed to RMB 14.7 million as of June 30, 2021, representing [indiscernible] growth of 37% from last quarter. On the credit side, total loan facility in the second quarter reached RMB 5.3 billion, showing a [indiscernible] increase quarter-over-quarter. The number of borrowers served this quarter stood at 434,153, representing an increase of 25% from last quarter. Now on to our financial. In the second quarter, total revenue increased by 49% year-on-year to RMB 1.1 billion, of which 27% came from our wealth management business. Due to enhanced cost control and operating efficiency, total net income in the second quarter grew by 10% quarter-over-quarter, representing a healthy net income margin of 18%. Total operating expense decreased by 17% year-on-year to RMB 0.8 billion. Sales and marketing expense decreased by 40% from prior year to RMB 457 million, driven by improved customer acquisition efficiency. Our origination and service expense increased 11% from prior year to RMB 183 million, mainly due to the continued expansion of our insurance business. Allowance for contract assets, receivables and others was RMB 93 billion this quarter, equivalent to 1.8% of our loan volume as compared to 2.9% last quarter. The decline was largely driven by improved asset quality and the change in product mix. On the balance sheet side, our cash position is again strong with RMB 2.2 billion of cash and cash equivalents as of June 30, 2021. Our strong balance sheet positions us well in the current operating environment and provides us with sufficient resilience to continue employing new initiatives and new opportunity and to meet annual capital requirements that may come. This concludes our prepared remarks. Operator, we're waiting for Q&A.

[Operator Instructions]. First question is from the line of Cindy Wang of DBS.

Congrats for the great quarter. I have three questions if I may. My first question is related to wealth management. Since sales volume of investment product was slightly slowing down from first quarter of this year, can we know what's the reasoning behind it? Is that because of seasonal effect or listing product adjustment on the platform? Besides that, fee rate for wealth management product is also down sequentially. Is that because investors subscribe more lower fee rate products on the platform or any other reasons behind it? So, entering in second half of this year, how do we expect the trend of sales volume and the fee rate? My second question is related to insurance. Since lately, regulators have issued an announcement related to the inspection on selling insurance products online. Any process you have taken? And is that going to impact your insurance sales in second half of this year? And the last question is related to consumer credit. Could we have the breakdown of auto loan and small revolving loan ratio? Since you highlighted that you will expand to the SME segment to better promote inclusive financing in second half of this year, so do you have any loan mix target that you could share to us about the auto loan, SME loan and the small revolving loan? And besides that, since the take rate for consumer credit further came down in the second quarter, so I think it's mainly because you acquired better quality borrowers which APR is lower. Since window guidance has been capped, APR at 24%, how do we see take rate in second half of this year and going forward?

I will have our CFO, Na, answer the first question regarding wealth management business, fee rate and so on. And then our wealth management business head, [indiscernible], is also online who can cover the second question regarding insurance, regulatory update, and also, if she may, comment on wealth management. And then the third question will be covered by Mei Zhou.

For the first question, I will answer the why the fee rate for our wealth management is down compared to the last quarter. It's mainly due to the mix of the products, mainly due to the [indiscernible] in the fourth quarter and the last – the fourth quarter. The main product of insurance is from the life insurance, for the people life. And so, the channel commission for the insurance company is higher, about general 17% or 18%. But in the second quarter of this year, the main first product is about the assets. So, for the asset insurance, the premiums is lower than the life and the general commission channel is about 14% to 15% from the insurance company. So, that is the reason why the fee rates are down for our wealth management. It's mainly due to product mix.

And, Zhou [ph], you will talk about the insurance policy change?

This is Na. For the regulation about our insurance, before that, I will confirm [indiscernible] and we think that mainly – the insurance regulator is mainly about the online insurance service. But Hexiang is also mainly offline. So, our management responsibly don't think they have any new regular to our insurance business.

I echo that. And we don't see any negative impact on how we do our insurance business. And, Mei, can you please answer the third question?

This is Mei. I think for the credit business, I think for the SME, we have been involved in the auto loan business for [indiscernible]. And some of the customer, actually, they're just SME owner. So, I think for our SME, we have a lot of old customer. We do treat them as a different product [indiscernible] lower the product from the better customer performance. So, I think the percentage is 20% to 30%. I think as we continue to expand our old customer segment, I think this percentage is improving to 60%. So I think that's why our asset equality is better and better, I think.

[Operator Instructions]. As there are no further questions at this time, management, please continue.

Thank you, everyone, for joining our call. This concludes our call for today. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. And thank you for participating. You may now all disconnect.