FinVolution Group (NYSE:FINV) Third Quarter 2022 Results Conference Call November 14, 2022 7:30 p. m. Eastern Time
Participating companies
Jimmy Tan – Boss, IR
Feng Zhang-CEO
Jiayuan Xu – Chief Financial Officer
Conference Call Participants
Yada Li – CICC
Alex Ye – UBS
Frank Zheng – Credit Suisse
Thomas Chong – Jefferies
Operator
Good morning, girls and gentlemen. Thank you for the call for the third quarter 2022 earnings convention for FinVolution Group. [Operator Instructions]. The call of today’s convention is recorded. Now I would like to pass the call on to your host, Jimmy Tan, the company’s Investor Relations Manager. Jimmy, please go.
jimmy tan
Thank you, Antoine. Hello everyone and welcome to our third quarter 2022 earnings convention call. The company’s effects were made known through the news of the previous day and are being published online. You can download the publication of the effects and sign up in the company’s email. alerts when visiting the IR segment of our online page in ir. finvgroup. com.
Mr. Feng Zhang, our General Manager; and Mr. Jiayuan Xu, our CFO, will start the call with their feedback ready and end with a response session.
During this call, we will refer to various non-GAAP monetary measures to measure and compare our operating performance. These non-GAAP monetary measures are not intended to be isolated or in lieu of ready-made monetary data presented in accordance with U. S. GAAP. U. S. For more information on those non-GAAP measures and reconciliation to GAAP measures, please see our earnings press release.
Before proceeding further, please note that today’s discussion will involve forward-looking statements made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent dangers and uncertainties. As such, the Company’s effects are likely to differ materially from the perspectives expressed today. Further data related to those and other hazards and uncertainties are included in the Company’s filings with the U. S. Securities and Exchange Commission. U. S.
Finally, we published a slideshow about our IR that offers the main points about our effects for the quarter.
Now I will turn on to our CEO, Mr. Feng Zhang. Continue, sir.
Feng Zhang
Thank you Jimmy. Hello everyone and thank you for participating in our call for winnings. As China’s macroeconomic environment slowly recovers from second-quarter lows, our domestic operations also appear to be slowly improving. With our strong track record and strategic execution, state-of-the-art generation functions and diversified borrowers across China, our business has remained resilient. We continue to provide strong monetary and operational functionality despite ongoing lockdowns affecting several cities in China.
While we are experiencing a portfolio of improvements in terms of pandemic restrictions and the macroeconomic environment, our operations in the third quarter remain challenging. Executives who have transitioned effectively through moving have gone through several credit cycles in our 16 years of operation.
Our total transaction volume in the third quarter reached RMB 45. 5 billion, representing a sequential expansion of 10% and a year-on-year expansion of 19%. % sequential and 34% year-on-year.
With the final touch of our business transition, our proportion of Class A and B borrowers in the domestic market who meet our credit criteria increased in addition to 75% of our general borrowers in the third quarter, up from 58% at the same time last year. .
We are also pleased to announce that we have completed our rate transition and that the existing average interest rate for our loan is approximately 23%, reflecting our commitment to selling monetary inclusion as our highest point of compliance and alignment with regulatory guidelines.
Technological innovation remains the cornerstone of our operation, allowing us to achieve consistent functionality in challenging times. Continuous changes were made to our credit threat assessment models, adapting to the COVID containment environment, allowing for stable and incremental expansion as our threat functionality fluctuated greatly even during the Shanghai lockdown. These strong operational effects are basically due to our complicated, state-of-the-art technologies, such as Magic Cube, our all-in-one fund control platform, which supports a wide variety of protocols and successfully combines institutional budgeting with real-time borrowers. Array It can manage up to 55 fund control projects with a daily processing capacity of over 50,000 files.
With a prudent and effective threat control framework, along with reliable credit threat assessment models and a fraud detection system, we have improved our threat metrics on several fronts. Our delinquency indicator on Day 1 was 5. 5% at the beginning of November, while delinquency rates in The 90 Days of September showed a further increase to 1. 34% compared to 1. 44% in the last quarter. As the influence of continued lockouts becomes more manageable, we expect our delinquency ratio for the third quarter to remain stable. by approximately 2. 3%. Encouragingly, our debt collection rate also remained solid and solid, above 90 consistent with percent.
At the same time, we remain cautious about supporting small business homeowners. In the third quarter, we served a total of 504,000 small business homeowners and provided RMB 11. 3 billion in loans for this segment, representing 25% of the total transaction. volume, an increase of 43% compared to the same was last year. Our small business homeowners are spread across Chinese cities in other industries, such as retail, wholesale, and soft manufacturing, among others, further reducing our similar threat across geographic location. and sectoral diversification.
We would also like to point out that approximately 60% of our small business owners have been in business for over 3 years, illustrating their overall stability. We will continue to monitor the economic recovery and adjust our strategy to keep pace with the small business recovery.
Let’s move on to our overseas expansion. We are very pleased to announce that with innovations on several operating fronts, this segment’s earnings contribution reached 12% of total earnings in the third quarter, marking the first time our earnings contribution exceeded double digits.
We also use our global logo strategy, which has noticeable effects on many operational metrics, such as the number of downloads, the number of new signs, and conversion rates. These achievements have earned our AdaKami app a position on the Apple Search Ads success stories page, popularity of the effectiveness of our methods in reaching new audiences.
With a stronger logo in the local market, our transition to premium borrowers in Indonesia exceeded our expectations, with the proportion of premium borrowers in the third quarter rising to 68% from 62% in the last quarter. Together with Indonesia’s macroeconomic situation environment and a COVID-19 easing policy, this raised the trading volume in foreign markets to RMB 1. 1 billion, representing a sequential accumulation of 22% and a year-on-year accumulation of 6%.
The ongoing transition to higher quality borrowers has also helped us deepen our relationships with local financial partners, as evidenced by the increase in the proportion of loans they facilitated to 48% in the third quarter from 39% in the last quarter and to 0% local. funding in the same era last year.
Looking ahead, we are confident in our ability to further increase the proportion of loans financed through local monetary institutions as we secure more local financial partners with a large number of high-quality borrowers.
Even more exciting, our remarkable foreign loans reached RMB 640 million, representing a sequential accumulation of 33% and a year-on-year accumulation of 88%. Our remarkable functionality in the Indonesian market obviously demonstrates that we can leverage our technologies and business models in the market.
In the future, we are confident that the contribution of foreign market revenues will continue to increase and that we will reflect those achievements in the Philippines and other suitable countries.
Finally, I would like to provide an update on our ESG performance. We continue to advance our ESG projects and make our component for the environment this year, this quarter.
In particular, we have received ISO 14064 verification from SGS, a well-known foreign criteria certification body. ISO 14064 provides industry and government with a set of equipment to expand programs to reduce greenhouse fuel emissions. and sustainable efforts to achieve carbon footprint relief and a willingness to have our reports reflected overseas.
In summary, our strong effects in the third quarter of 2022 are a testament to our resilient business model, state-of-the-art technologies and extensive operational expertise and resources. In the future, we will continue to focus on sourcing superior customers, refining our proven threat profile and control framework while pursuing high-quality expansion opportunities in China and abroad.
Together, those efforts will allow us to seamlessly navigate a fast-converting market while providing sustainable expansion and creating a wonderful price for our customers, shareholders, and all stakeholders.
With that, I will now pass the call to our CFO, Jiayuan Xu, who will talk about our monetary effects for the quarter.
Jiayuan Xu
Thank you, Feng, and good morning everyone. Welcome to our call for the effects of the third quarter of 2022. For the sake of time, I will go through all the monetary elements of this call. See our effects release for more details.
As Feng mentioned, despite the demanding operational situations in the third quarter, we are encouraged by the fact that our quarterly effects were in line with our expectations, adding the quarterly improvement in trading volume in threat measures and the strengthening of our overseas business. among others.
With more high-quality borrowers, along with our successful pricing transaction and cutting-edge technologies, our founding partners are more willing to offer us high interest rates, as evidenced by our tiered financing prices at 7. 1% in the third quarter. of 7. 5% in the previous quarter.
In addition, a cumulative number of our institutional partners has grown to over 70 with a strong pool of potential partners in place. In the future, we plan to diversify our investment channels through ABS and secure a wide diversity of monetary establishments to further optimize our investment costs. Driven through our [indistinguishable] efforts to optimize our operations, the effective execution of our overall strategy, and the skillful deployment of our generation functions across the enterprise, our net cash in the third quarter reached approximately RMB 3 billion, plus 18% year-on-year. We also achieved a healthy non-GAAP operating profit of RMB 683 million. Our share of small-cap models has also remained strong at around 18%, and we expect to keep this share close to the current point in the future.
In addition, our leverage ratio, explained as the balance of threatened loans divided by equity, remained solid at 4. 2x. Thanks to the continuous improvement of volume pricing, our robust threat functionality and our constant investments in studies and development, we have controlled with positive effects on our business activities. Going forward, we will continue to closely monitor trends in investment prices and threat metrics.
Between January 2022 and October 2022, we deployed approximately $40 million to buy back our percentages on the public market. Since introducing our percentage buyback program in 2018, we have accumulated approximately $171 million to repurchase our percentages in the public market, demonstrating the commitment to long-term shareholder return.
Before concluding my remarks, let me add a few more colors to our business outlook for the fourth quarter of 2022. Despite the challenging macroeconomic environment in China, we will continue to make progress by strengthening our overseas initiatives, optimizing operational efficiency, strengthening our good-fortune transaction to premium quality borrowers, and driving technological innovation.
We would like to reiterate that our overall transaction volume for the full year 2022 remains unchanged at a range of RMB 175 billion to RMB 180 billion, representing a year-on-year expansion of 27% to 31%.
With that, I will conclude my prepared remarks. Now we will open the call for questions. Operator, continue.
Q&A session
Operator
[Operator Instructions]. Our first will come from Yada Li of CICC.
Yada Li
Okay, then I’ll do the translation part. Therefore, the former is compared to our peers, and we will achieve higher expansion rates with a lower origination price aimed at slowing the expansion of the overall customer credit market. So, could you elaborate on the reasons?And looking to the future, is it imaginable that we can continue to grow at a higher rate of expansion relative to the market and our peers?So this is the first one.
And for now foreign trade considerations. So how much will this contribute to our sales of new loans and overall earnings through the end of this year and next?
jimmy tan
Yada is Jimmy. Let me do the translation for Alexis. In the third quarter, the scenario is still complicated. For example, in the current quarter, we experienced a crash in Shanghai and customer confidence is still low. And, of course, the resurgence of COVID has affected the macro environment with ongoing lockdowns. And while the macro environment remains largely unchanged, we still monitor for positive results. Total loan origination volume in the third quarter reached RMB 45. 5 billion, validating the resilience of our business. This is due to several reasons.
For example, our experience in cycles of navigation credits earned; our successful business transition to higher quality borrowers, enabling us to achieve positive effects in uncertain times; and also our technological functions accumulated over the years.
Let me share with you an example of the COVID situation. For example, when we encounter a containment situation, we make non-stop changes to refine our threat models tailored to the other categories of threat spaces such as low, medium, high. When a domain has been known as a threat domain, we will monitor and make changes to models and regulations within 2 days, and quick methods will also adapt to the other spaces. Thanks to our proactive strategy, we have achieved a very positive improvement.
For the outlook, the macro environment is confusing and without primary adjustments in fundamental policies and with the uncertainty that persists in the economy. While demand for credit remains stable, there are likely to be fluctuations in the future. And in the longer term, we remain very confident about expanding customer markets in China.
jimmy tan
Yada, let me redo the translation to Alexis. La transition of our overseas business to higher quality began in the current part of 2021, and we have also reported a successful transition in stages since last quarter.
And in the third quarter, we continued to strengthen our overseas business and revenue contribution from this segment with a double-digit contribution to revenue in the first part of this year. The transaction volume in the third quarter reached RMB 1100 million, a sequence of 22% accumulation, and at the same time, the notable loan balance also reached RMB 640 million, a sequential accumulation of 33%. And for the future, we are confident of our overseas markets because the policies in Indonesia and the Philippines are much more on display right now. And in the Indonesian market, our transaction volume is expanding as we transition to more political borrowers.
And in the third quarter, our share of higher-quality borrowers increased to 68% from 62% last quarter. And with larger or larger borrowers, lately we’re working with more local monetary institutions. We work with Bank Jago and 2 other local money banks. And in the future, we are confident that we will further increase the proportion of loans financed through local partners.
And for the scenario in the Philippines, on the right, we are sure to replicate our good fortune in the Philippines and other suitable countries. And we are also actively exploring new products, such as working with hypermarkets to expand consumption scenarios.
And in addition to Indonesia and the Philippines, we are also actively comparing new countries and markets to find suitable local partners, seeking licenses, and we want our technologies and functions to be leveraged in more countries and monetary institutions. We will continue to expand in foreign markets at double-digit rates with a continued increase in profit contribution.
Operator
It is ok. To get the advantages of all participants in today’s call, if you want to request your control in Chinese, repeat it in English.
The next one will come from the hand of Alex Ye of UBS.
Alex Ye
So I have two questions. The first considers its outlook for the coming year. Understand that you are not in a position to talk about your instructions for the coming year, but that you just want to put your color in your direction and strategy. So since China is having a lot of talk about reopening and we’ve noticed that more concrete measures are being implemented, so I’m wondering how to balance its expansion and threat control for next year. And if we see China proceeding to reopen next year, what will that expansion look like?The speed of our expansion? In other words, what kind of activities or symptoms do we want to see to make ourselves more comfortable with our expansion?
And the timing is all about your sales and marketing expenses for this quarter. It’s quite sequential. So, I wonder how, to what extent does it relate to domestic or foreign markets?What are the main drivers of construction and prospects for the future?
jimmy tan
Alex is Jimmy. Let me do the translation for Alexis. Let me share with you the company’s strategy. The global picture is still confusing and, if you take a look, there are other policies in the country. What we’re looking to do now is look for the best [indistinguishable] quality. And this can be translated in several ways.
For example, expand the contribution to foreign market revenues and penetration into more markets and locate the right consumers. These consumers will be much firmer and much more resilient in a confusing environment. And number three, have a proper balance sheet with sufficient liquidity and have a separate lever to deal with demanding situations in the competitive environment.
jimmy tan
Alex, let me do the translation. The environment in China is much more complicated, although we have noticed or noticed positive symptoms of supply in recent days, however, the effect on the economy is still doubtful globally. We will still want to keep an eye out for some symptoms, such as reports. And, of course, we will make the appropriate changes when we see an improvement in those symptoms.
jimmy tan
Alex, let me do the translation for you. From the point of view P.
And our borrowers have an LTV of more than 36 months. In the third quarter, construction: We also increased our visitor acquisition efforts compared to the current quarter. That’s why you’ve noticed a general construction in sales and marketing. However, in the fourth quarter, we will see an improvement in our visitor acquisitions and saw a rate reduction of approximately 10%.
Operator
The next one will come from Frank Zheng of Credit Suisse.
Franck Zheng
Frank talks about Credit Suisse. I have 2 questions. The first is the monitoring of foreign markets. Can you provide more information about the share rate of foreign markets, as we see in terms of contribution to revenues, they are around 12%, but in terms of volume or balances, it is still low?And also, in terms of net income, what is the percentage of foreign markets?
The consultation at the moment relates to loans to small business owners. About 25% of the loan volume is for small business owners. As we understand, SMEs tend to be more cyclical and sensitive to the macro environment, what kind of credit quality trend do they have?A noticeable difference compared to the loss of consumption?
jimmy tan
Franck is Jimmy. Let me do the translation. The Indonesian market, right, is our main concentrate at the moment, and it is very different from the Chinese market in terms of price, threat and borrower profile. Our product is one hundred percent compliant with regulators and we are also in the process. to switch to higher quality borrowers. The catch rate is solid and, if compared to the Chinese market, is much higher, around 10%.
And as for the contribution to net income, it remains low. The main explanation is that we are reinvesting in the Indonesian market as we are developing this component of our business.
jimmy tan
It is ok. Frank, let me do the translation. And in the third quarter, we served a total of more than 500,000 small businesses and provided RMB 11. 3 billion in loans, accounting for about 25% of the total transaction volume.
Let me remind you that our small business owners are an herbal extension of our existing business end-users, and they have an average price of around RMB 20,000, which is not very important, and the threat is very manageable compared to SME loans.
And while the effect of blocking is more severe for businesses, I should point out that approximately 60% of our small businesses have been in business for over 3 years, and their overall stability and threat functionality are better.
And in the past, it’s true, we noticed our small business threat functionality and customer lending functionality at a similar baseline. Increased threat functionality for them.
Operator
[Operator Instructions]. The next one will come from Thomas Chong with Jefferies.
Tomas Chang
My first query has to do with business abroad. Since we have noticed that SEA Grab and GoTo invests in the FinTech sector and that a lot of progress has been made so far, I just need to ask about the strategies of Indonesia and the Philippines, if we would. cooperating with them or if the market is large enough to move to an independent base.
And my moment considers national issues. How to think about the contribution of SMEs in the coming quarters?
Feng Zhang
Thomas is Feng. Let me answer your first question. Yes, I think it’s a very smart question. I mean, in general, as Alexis mentioned, we are very positive about our overseas opportunities, especially our existing market in Southeast Asia. Well, if you look around the world, there are many countries or markets as as Indonesia and the Philippines. From our point of view, these countries have very intelligent opportunity qualities for economic progress and prospects for expansion, particularly in the segment of customer credit. So when we look at them, in a way, it’s very, in a way, in many ways, it’s similar to China around 2014. So there are tons of opportunities. And I think we have. I mean we’ve been in those markets for several years. So I think we’ve established a leadership position, a very smart position in the competition.
And one of the things that, as you mentioned, excites us about this market, I think we have. . . The market is much more open from a regulatory point of view, from a regulatory point of view as well as from a festival. perspective, which is, I mean, the two perspectives are very different from our domestic market in China. This bodes well for our prospect of expansion and opportunities for advancement. And it gives us more opportunities to do things that, frankly, are not very viable in our home market.
So, things like accessing POS financing, things like partnering with upcoming giants like GoTo, or even things like getting into segments like virtual banking, right?These are things that are not as imaginable as in the interior of China, very difficult. But there are tons of opportunities that are wide open. So I think as we continue to grow our business in those markets, we’ve established a very strong presence there. I think all of those things are imaginable, and we’re actively pursuing expansion opportunities. Yes, thanks.
jimmy tan
Thomas, let me do the translation. According to the existing environment, loans to small business owners will not be a priority for our company. And going forward, with the current trend of around 25%, we will keep our small business lending ratios at similar levels.
Operator
Since there are no more questions now, I would like to call the company again for final comments.
jimmy tan
Thank you all for our third quarter earnings convention call. If you have any additional questions, please feel free to contact our offline or online investor relations team. Thanks a lot.
Operator
This concludes this call for the convention. You can now disconnect your lines, and thank you.