FinVolution : First Quarter 2023 Earnings Conference Call Transcript

[FINV] - FinVolution Group

Q1 2023 Earnings Conference Call

May 17, 2023, 8:30PM ET.

Officers

Tiezheng Li, Chief Executive Officer

Jiayuan Xu, Chief Financial Officer

Jimmy Tan, Head of IR

Analysts

Yada Li, CICC

Alex Ye, UBS

Frank Zheng, Credit Suisse

Presentation

Operator: Hello, ladies and gentlemen. Thank you for participating in the First Quarter 2023 Earnings Conference Call for FinVolution Group. (Operator Instructions). After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded.

I'll now turn the call over to your host, Jimmy Tan, Head of Investor Relations for the Company. Jimmy, please go ahead.

Jimmy Tan: Hello, everyone, and welcome to our first quarter 2023 earnings conference call. The Company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the Company's email alerts by visiting the IR section of our website at ir.finvgroup.com.

Mr. Tiezheng Li, our Chief Executive Officer, and Mr. Jiayuan Xu, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session.

During this call, we will be referring to several non-GAAP financial 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 U.S. GAAP. For information about these non- GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views

expressed today.

Further information regarding these and other risks and uncertainties are included in the Company's filings with the U.S. Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Finally, we posted a slide presentation on our IR website providing details of our results for the quarter.

I will now turn the call over to our CEO, Mr. Tiezheng Li. Please go ahead, sir.

Tiezheng Li: Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. This is Tiezheng Li, CEO of FinVolution. We are happy to speak with you today. The first quarter of 2023 was a challenging one domestically, given the complex macro environment. The Chinese New Year holiday, coupled with China's re-opening post- pandemic, created short-term turbulence throughout the economy. However, despite various headwinds, we delivered another quarter of healthy growth, with total transaction volume up 9.3% year-over-year to reach RMB43.4 billion and total outstanding loan balance up 15.8% year-over-year to reach RMB62.3 billion.

We also steadily and successfully executed our Local Focus, Global Outlook strategy throughout the Pan-Asian markets in which we operate, expanding our borrower base to 28 million cumulatively across China, Indonesia and the Philippines.

In line with our mission of leveraging innovative technologies to make financial services better, we have cumulatively invested over RMB2 billion in technology over the last 5 years. We remain committed to exploring areas such as data tools, natural language processing and other AI technologies to improve our data analysis capabilities, and drive the holistic digitization of consumer finance across multiple aspects. As such, we have integrated natural language processing models into our chatbots, and our AI team developed a real-time data platform combined with strong integrated computing capability to support their applications. These generative, pre-trained models have created a tremendous opportunity for our business to improve user experience and operational efficiency.

We are also pleased to share that FinVolution has officially launched plans to build an open-source model platform, aiming to improve the efficiency and effectiveness of our intelligent marketing and customer service operations. We are confident that as we continue to refine and implement natural language processing and speech-related algorithms into our intelligent chatbots, they will greatly improve the conversation experience between FinVolution and our customers. Specifically, we are currently pilot testing the application of ChatGPT and other language learning models in our CRM System and Smart loan collection system, further driving the digitization progress across all of our customer service metrics.

Approximately 80% of our customer service inquiries are now solved through chatbots, leading to an increase of over 50% in our CRM system's efficiency.

Supporting financial inclusion is another critical piece of our mission and another area where we can capitalize on our cutting-edge, proprietary technologies to deliver outstanding results. Thanks to our Octopus system for high-quality borrower acquisition and our Magic Cube for loan matching, we further reduced our average borrowing rate in the first quarter to 22.7%.

Furthermore, our Magic Mirror technology for credit risk assessment updated with revised algorithms spurred improvement across our risk metrics. These accomplishments alongside our acquisition of higher-quality borrowers, our efficient loan matching process with institutional partners and our consistent, fruitful investments in technology, enabled us to gain recognition from our partners and achieve better-than-expected funding costs, which supported a stable take rate of 3.5% for the quarter.

Before we move on to more operational and financial metrics, I would like to share a brief update on our ESG efforts. In addition to our ongoing endeavors to support financial inclusion, we recently established FinVolution's consumer protection initiatives guided by the high-level goals of Be Responsible and Be Compassionate to help educate our borrowers on their personal finance management. This will gradually improve the quality of our borrowers, as well as our customers' financial lives, benefiting our business while creating value for the society. We look forward to reporting more fully on our ESG achievements when we release our 2022 annual ESG report in the coming months.

In short, we remain convinced that technological innovation will transform the future of consumer finance. Our Local Focus, Global Outlook strategy will guide us as we move confidently through 2023, building on our technological capabilities to expand our customer base and leverage on our strong balance sheet to accelerate the pace of our international expansion.

With our mission firmly in mind, we will continue to invent and deploy creative technologies across all aspects of our operations, empowering rapid business growth while enhancing our customers' lives and delivering greater value to our shareholders.

With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our operational and financial results for the quarter.

Jiayuan Xu: Thank you, Li, and hello, everyone. Welcome to our first quarter 2023 earnings call. In the interest of time, I will not go through all of the financial line items on this call. Please refer to our earnings release for further details.

As Li mentioned, the domestic macro environment continued to present challenges during the first quarter despite the acceleration in the recovery toward the end of the quarter, reflected by improvements in the Purchasing Managers' Index across a variety of industries such as retail, transportation, business services, dining and tourism. However, the index fell to 49.2 in April, below the threshold that separates contraction from expansion, indicating that the economic recovery is still fragile and in an early stage.

Sales of larger ticket items, such as automobiles, telecommunications equipment and real estate also lagged due to the slower recovery of consumer confidence. During the first

quarter, the total social financing amount grew by RMB14.5 trillion. However, April's total social financing amount only grew by RMB1.2 trillion, which was way below market expectation. Although there are some near-term fluctuations in the macro data, the overall recovery trend remains positive.

On a brighter note, during the first half of May, we also experienced a sequential increase in our user demand and loan application rate compared to the first quarter and the month of April. As such, our outlook remains cautiously optimistic. We will closely monitor the progress of recovery and expect that growth will accelerate in the second half of 2023.

Domestically, our first quarter transaction volume rose year-over-year to RMB41.8 billion, representing an increase of 8%. Meanwhile, our total outstanding loan balance stands at RMB61.3 billion, up 15% year-over-year.

Given the lingering sluggishness in parts of the domestic economy, we maintained our prudent approach to risk management during the first quarter, and expect vintage delinquency to be around 2.3%. The recent D1 delinquency in April also showed improvement to 5.3%. We are also pleased to share that we achieved a strong loan collection recovery rate of 90% in the first quarter.

As we deepened our commitment towards financial inclusion through our transition towards better-quality borrowers and subsequent improvements in borrowing rates, we significantly optimized our funding cost in the first quarter to 6.7% from 7.8% a year ago. We also grew our cumulative number of funding partners to 78 financial institutions while maintaining a stable average ticket size of around RMB7,900 with an average loan tenure of 8.5 months. Going forward, with our pool of high-quality borrowers, we are confident that we will attract an array of potential partners.

On a related note, we have continued to support small business owners throughout the recent domestic economic downturn. As China's macro economy gradually recovered during the first quarter, we noted steady improvements in this segment's risk metrics.

Hence, we maintained our momentum and served 425,000 small business owners during the quarter, with transaction volume accounting for around 24% of our total origination volume.

Now I'd like to share some additional details on our international expansion. Indonesia, our largest overseas market, is still projecting GDP growth of 4.8% in 2023 despite a mild slowdown. The consumer confidence index is high at 100 points, and consumption activities have contributed more than 50% of GDP over the last 10 years. Coupled with cautious fiscal and monetary policies from the central bank, we expect Indonesia's domestic consumption to remain strong.

We are thrilled by the progress we've made in our overseas markets across multiple operational and financial metrics. Cumulatively, we served 3.7 million borrowers in our overseas markets, while our unique number of borrowers for the quarter increased by 24% year-over-year to 737,000. International loan volume soared by 83% year-over-year

during the first quarter to reach RMB1.57 billion while outstanding loan balance grew 164% year-over-year to RMB0.95 billion.

Alongside robust operational metrics, international revenue reached RMB448 million, an increase of 166% year-over-year, and contributed around 15% of total revenue in the first quarter. We are encouraged by the pace of expansion in the international markets, and expect its revenue contribution to increase to about 20% of revenue for 2023.

In Indonesia, we continue to expand our local presence and strengthen relationships with local financial institutions, while our partnerships with Bank Jago, Bank Permata and OCBC are flourishing. During the quarter, we also established a new cooperation with SeaBank, an Indonesian tech-based banking company whose mission of bettering the lives of consumers and farmers in the region with technology that strongly aligns with our own.

These thriving relationships have empowered us to increase the proportion of loans funded by local banks in Indonesia to 64% in the first quarter of 2023 compared with just 15% in the same period last year. These achievements clearly reflect the effectiveness of our Local Focus, Global Outlook strategy.

We are encouraged that FinVolution delivered respectable financial performance amid all of the first quarter's challenges. Driven by our consistent investments in technology and our strategic shift towards serving better-quality borrowers, net revenues for the first quarter rose to 3.1 billion, up 25% year-over-year.

Furthermore, given our outstanding operational efficiency as well as our prudent attitude towards credit risk assessment and the write-back of provision due to better-than- expected credit risk performance, net income for the first quarter reached RMB690 million, up 29% year-over-year and 24% sequentially.

Meanwhile, diluted net profit per ADS was RMB2.42, an increase of 34% year-over-year and 27% sequentially.

Our leverage ratio, which is defined as risk bearing loans divided by shareholders' equity, remained stable at 4.3x, indicating the potential for further growth when the economic recovery accelerates during the second half of the year. During such times of uncertainty, our strong balance sheet and liquidity position continues to provide confidence to all our stakeholders. In particular, our cash position remains robust with over RMB7.8 billion of cash and short-term liquidity as of the end of March 2023, representing an increase of 10% sequentially.

Along with our fifth consecutive annual dividend, which we issued last quarter, we also continue to return value to our shareholders through share buybacks throughout the year. In the first quarter of 2023, we deployed around US$13.4 million to buy back our shares in the public market. As of March 31, 2023, the Company has cumulatively deployed around US$196 million for its share repurchase programs. In total, we have returned US$458 million to our shareholders in the form of dividend and share repurchase programs.