360 DigiTech Inc

NASDAQ:QFIN

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech First Quarter 2022 Earning Conference Call. Please also note today's event is being recorded.

At this time, I would like to turn the conference call over to Ms. Mandy Dong, IR Director. Please go ahead, Mandy.

[Mandy Dong, Investor Relations Director]

Thank you. Hello, everyone, and welcome to our first quarter 2022 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Xu, our CFO and Director; and Mr. Zheng Yan, our CRO.

Before we begin the prepared remarks, I’d like to remind you of our Safe Harbor statement in our earnings press release, which also applies to this call. We may refer to forward-looking statement based on our current plans, estimates, and projections.

Also, this call includes discussions of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP ones. Last, unless otherwise stated, all figure mentioned are in RMB.

I will now turn the call over to our CEO, Mr. Wu Haisheng.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

Hello everyone, I'm very happy to report a strong start to 2022. In Q1, total loan origination and the facilitation volume reached RMB 98.8 billion up 33% year-over-year, and 2% q-on-q, outstanding loan balance reached RMB 146.7 billion up 44% year-on-year and 3% q-on-q. Despite the [indiscernible] impact round the Chinese New Year and the macro and the COVID outbreaks, our solid performance continued to demonstrate the resilience and flexibility of our operations.

[Foreign Language]

I reckon the major concern to the market right now is the COVID outbreaks. To deal with the situation, we created precautionary plans, we took rapid response measures to make the impact on our business under control. Such an effective response derived from our successful experience, handling the pandemic that hit all back in 2020. Back then, our response was seen as very timely and effective in the industry.

As the COVID resurgence in Q1, a number of Chinese cities, our team will set and implemented a range of pre-emptive counter measures. For example, we launched a multiperiod of pandemic alert system for the cities that are key to our business.

In addition, we strategically scaled back our business for high-risk customers in the industry hit by outbreaks, such as recreation and hospitality. Meanwhile, we proactively communicated with major funding partners about potential extension for loan repayments. For a borrower who are unable to make repayments on time or lost the capacity to repay in the near term due to COVID.

Our customer service team step in and help them to apply for repayment expansion. In the cities severely affected by the lockdown it was very difficult for our offline team to acquire new customers, in such cases, we quickly shift our team focus from offline customer acquisition to serving existing customers these allowed us to uphold the moral and sustain business performance.

[Foreign Language]

Thanks to the backing measures to mitigate impacts from COVID. And our strategy to optimize customer base, we successfully keep the impact to our asset quality under control. In the first half of this year, we are working to upgrade our customer base. This includes to acquire more high-quality users, [indiscernible] resource to better serve high-quality users and then reducing exposure to high-risk borrowers. With these measures in place, the percentage of our Category A user's those with the best credit profile greatly increased from budgeted level.

[Foreign Language]

Our first payment [indiscernible] 30 days, which represent the percentage of our first payment before for 30 days. So new loan origination also dropped q-on-q. At the same time, we upgraded our cloud bank system, which connect consumer demand with institutional offerings through a smart matching meaningfully improved asset quality of online loans facilitations segments.

For example, expected advantage loss rates decreased to 2.4% to 2.7%, recently, from 2.83% in Q4, last year.

[Foreign Language]

The credit quality of our new customers in Q1 was better than any of our previous quarters. [Indiscernible] with the impact of COVID this performance was significantly better than last year. And we believe it will continue to improve. Although there was some fluctuation for the asset quality of our existing loan book due to COVID, the overall impact is still within the control. Apparently, the day one delinquency rate of existing loan book is 4.97% better than last year, and at a relatively low level on record.

Our collection rate dropped in Q1 with a significant drop in the lockdown cities such as Shanghai and Jiling, however, will notice that by May, the collection rate has stabilized in this region, and it started to improve national wide. As our user base continues to optimize, our risk performance will keep improving gradually.

[Foreign Language]

In Q1, our offline operation was restricted in some cities under COVID lock down, such as Jiling, the lockdown temporarily put some pressure on offline user acquisition. The overwhelming impact on our online user base was limited. Although we do notice that many of them were less willing to spend in the challenging environment. Even in Jiling with this relatively long lockdown, our total transaction volume only showed a small decrease compared to the pre-lockdown level.

Currently, most municipal districts in Shanghai have reached zero COVID at the community level, and the businesses are expected to resume operations in the near future. As such, our operations in this region are likely to gradually return to normal.

[Foreign Language]

Although COVID-related uncertainties are likely to persist throughout this year. With the set of counter solutions we have deployed over time, and our enhanced ability to effectively respond to new outbreaks. We are confident that we will continue to keep the impacts of the pandemic to a manageable level.

[Foreign Language]

Next, let me provide an update on industry policies, which the market follows closely.

[Foreign Language]

We have seen part of this top-down policy developments for the industry. On April 29, a political bureau [indiscernible] reports of healthy development of platform economy, and to complete the special rectification measures for the platform economy. PBOC and the CDIRC made similar comments at following special meetings. Both regulators are about to complete rectification of financial operation of platform companies, implement normalized supervision and support healthy development of the platform economy. These signals that the current rectification of the industry is close to an end related internet platform company will complete rectification process under the guidance of financial regulator and it will be under regular supervision afterwards.

After over a year-long rectification, these companies will be the first in the industry to be fully compliant and will be well positioned to develop a healthier and more sustainable framework.

[Foreign Language]

At the industry level in early April this year, PBOC and CDIRC, jointly issued the notice to enhance financial service to support pandemic control and the economy and social development. The documents mentioned leveraging the benefits of financial service provided by internet platform company while promoting the discipline and healthy development of such services. This is a recommendation by the financial regulator of the positive role in the net platform company play in financial services.

[Foreign Language]

On the business brands, our strategy and focus this year is to structure optimization of our user base and funding sources to enhance user lifetime value and increase the sustainable contribution of high-quality fundings, therefore, further improve our operational resilience. In Q1, we achieved a noticeable progress in some key areas.

[Foreign Language]

On the funding ground, we continued to optimize our funding structure. First, we ensured a sufficient funding supply to support business growth. Second, we continuously optimized the funding costs and the contractual terms with our funding partners. At our high-quality assets are in high demand by financial institutions. Third, we expanded the funding partnership with joint stock banks and the major urban and rural commercial banks, which have broader regional coverage and a strong funding supply. Such expansion will prepare us to better serve business growth and deal with economy uncertainty. So far, we have connected with approximately 70% of national wide financial institutions. Although, add three more national joint bank or private banks into our partnership and have another seven in the pipeline.

[Foreign Language]

At the product ground, we have followed our regulatory guidance closely. Specifically, starting in April, the IRR of all loans originated to our platform is within 24% ahead of the regulatory timeline, regarding credit agency reform, we act proactively and have designed our workload structure with credit agency, we tend to gradually implement these procedures.

[Foreign Language]

In addition, we have also adapted product offerings to align with our optimize the funding structure, reflecting the asset preference of new national funding sources. This allowed us to improve our loan approved rate. In Q1, we connected with more national joint stock banks. Meanwhile, given the preference of big banks will higher quality assets and the increased risk of new prime borrower in the current macro environment. We restructured our asset infusion engine to optimize the matching between loans and the funding institution. We also introduced a dynamic adjustment in Canada for the return of financial institution. Canada allows banks to get a fine loan that aligns with their preference while ensuring their expected return. The loan approval rate of our partner bank grow above 75% in Q1 down roughly 70% last December.

[Foreign Language]

As for our users, our key strategy this year is to improve the quality of user base. So far, we have achieved very noticeable progress. Specifically, we leveraged a combination of newly developed pre a model, RTA, real-time API technology and the capacity expansion to effectively optimize the quality of user acquisition. Amount the customer that applied third line in Q1, 31% received the highest rating from the financial institution for their low profile. Multiple key indicators of user quality continue to improve such as ratio of user with fewer multi-platform credit lines, user with mortgage in the car loan, user with a stable income and user with tangible assets. There are improvement of this indicator show that we have greatly enhanced the resilience of our business and increased user time value.

[Foreign Language]

The external environment brought a lot of challenges to our business in Q1. However, our team once again, met the challenge and delivered solid results. Given the ongoing uncertainty related to the COVID, we will continue to stay vigilant of potential risks and to maintain prudent operations in order to accomplish our strategy objective in this transitional year.

[Foreign Language]

2022 will be a quite challenging year for both our company and the industry. There is pressure on the China U.S. relations on ADR, regulatory developments for industry and impact from the pandemic. Nonetheless, we believe these factors are gradually turning around, especially with recent policies signals. In addition, our consumer low assets demonstrates very strong resilience during the pandemic.

Looking at our current data compared to the time in the pandemic back in 2020, we are quite confident from business prospects as the most recent wave of COVID outbreak gradually stepped aside in China. We expect to see business activities return to normal. The structural upgrades we have made this year on our user base and the funding network. It will put us in a more competitive position. We have seen greater demand for our service, both from end users and from financial institutions and that precisely this let to our growing value.

Going forward, we will invest more in technology to boost our operational efficiency. This will enable us to continually build up our competitive advantage in our markets of quick scale and magnitude.

[Foreign Language]

Next, I will turn to our CFO, Alex.

[Alex Xu, Chief Financial Officer]

Okay. Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our first quarter earnings call.

As Haisheng discussed earlier, we had a pretty solid quarter in the rather rough period of time from micro economic perspective. Consumers demand for credit come in more or less consistent with normal seasonality in Q1. Well, we did experience some impacts from the resurgence of the COVID in some regions in China. Overall, asset quality was actually modestly improved during the quarter as optimization of our risk model and the contribution from high-quality new borrowers more than offsetting COVID-related fluctuation among existing borrowers. Of the two leading indicators of the asset quality, overall day one delinquency improved to 5.2% from 5.4%, q-on-q. More importantly, day 1 delinquency for new borrowers in Q1 came in well below 4%, indicating clearly better quality versus existing borrowers.

Overall, 30-day collection rate declined modestly to 86% from 87% q-on-q, mainly because we have to make necessary adjustment to our collection operation in regions been significantly impact by COVID. Again, we see clear deviation between new borrowers and existing borrowers. For new borrowers, 30-day collection rate remained above 90% in Q1. These risk metrics further validate the effectiveness of our user acquisition strategy, which focus on high-quality segment of the market.

Total net revenue for Q1 was 4.3 billion versus 4.4 billion in Q4, and 3.6 billion a year ago. Revenue from credit driven service capital heavy was 2.9 billion, compared to 2.7 billion in Q4 and 2.5 billion a year ago. The year-on-year and sequential increase was mainly due to longer average tenor of the loans, a growth in our balance sheet loans, as well as the releasing guarantee liability on previous loan balance more than offsetting the negative impact from decline in average prices of the loans.

Capital heavy facilitation revenue take rate actually improved modestly versus Q4 also, due to longer tenor. Revenue from platform service capital light was 1.4 billion, compared to 1.7 billion in Q4 and the 1.1 billion a year ago. The year-on-year growth was mainly driven by a significant increase in capital light loan balance. The sequential decline was due to a decrease in capitalized loan volume along with the decline in cap-light revenue take rate in Q1.

During the quarter, cap-light and other technology solution contribute roughly 64% of the total loan volume. As we discussed in previous calls, we expect cap-light and other tech solutions percentage contribution to our total volume to remain fluctuating around current level throughout this year. Longer term though, we will continue to pursue tech driven business model and expect cap-light to become a larger portion of our business in the long run.

During the quarter, average prices of our loan portfolio dropped by 50 basis points, and we're below 24%. In fact, all new cap-heavy and cap-light loans are already priced below 24%, at this point in time. We're very confident to achieve the rate cap requirement ahead of the regulatory deadline.

During the quarter, sales and marketing expense declined approximately 12% q-on-q mainly because of the Chinese New Year holiday, as well as our prudent control of the pace of our user acquisition. On a blended basis, average cost per user was proved credit line was 417 compared to 319 in Q4. Again, this blended calculation evenly spread sales marketing expenses among users with high credit line of between RMB 100,000 to RMB 200,000 as well as those who are regular users with credit line between RMB 10,000 to RMB 20,000.

Logically, unit cost to acquire those high-ticket size users should be justifiably a much higher than the regular users. Therefore, make a comparison of planned user acquisition cost become neither relevant nor reliable. So on a apple-to-apple basis, excluding large ticket size users, average cost per approved credit line of regular users was approximately 322 in Q1 compared to 246 in Q4.

More importantly, average cost per dollar month credit line remained relatively stable q-on-q for regular users. As always, we will continue to use lifecycle ROI and LTV as key metrics to determine the pace and the scope of our user acquisition strategy to ensure the sustainability and the probability of our operations. Although, overall risk profile of our user -- of our loan portfolio modestly improved in Q1, due to the contribution from high-quality new users, the impacts from macro uncertainty and COVID resurgence were still noticeable among existing users. Therefore, we continued to take a prudent approach in booking provisions against the potential credit loss.

New provision for contingent liability for loans originated in the quarter was approximately 1.4 billion. Meanwhile, approximately 440 million of provisions for contingent liability of previous period loans was written back as actual performance of those loans with better than expected. With operating results and stable contribution from cap-light model, our leverage ratio, which is defined as a risk bearing loan balance, divided by shareholders equity was at historically low at 4.2x in Q1 compared to 5.4x a year ago. We expect to see rather stable leverage ratio for the time being until capital light contribution resume growth in the future.

We generate approximately 1.4 billion cash from operation in Q1, compared to 2 billion in Q4. The decline in operating cash flow was mainly due to some COVID-related timing issue. As Shanghai in lockdown late in Q1, we were unable to complete some administrative procedures that normally are required near the end of a quarter to collect receivables from some financial institutional partners. As such possibly 400 million Q1 receivable are pushed into Q2 to collect assuming the lockdown in Shanghai gradually easing.

Total cash and cash equivalent was 9.8 billion in Q1, compared to 9.6 billion in Q4. Non-restricted cash was approximately 6.2 billion in Q1 versus 6.1 billion in Q4. As always, a significant portion of our cash would normally be allocated to support the security deposit and other usage in our normal business course.

As we continue to generate healthy cash flow from operations, we believe our current cash position is sufficient to support the growth of our business to invest in key technologies to satisfy potential regulatory requirements and to return to our shareholders. In accordance with a dividend policy approved by our board last year, we declared another dividend of U.S.$0.22 per ADS for Q1. The cash dividends represent approximately 20% of our Q1 earnings.

Finally, regarding our outlook for 2022. As we communicate to the market previously, we believe 2022 will be a transitional year for the industry as the participants are adjusting to the new regulatory settings. Meanwhile, the unexpected outbreak of COVID as well as associate measures to control the outbreak, create additional macro uncertainties. Therefore, we want to maintain a prudent approach to plan our business and to mitigate potential risks.

At this point in time, we would like to keep our full year loan volume guidance of between RMB 410 billion and RMB 450 billion unchanged, representing year-on-year growth of 15% to 26%. We view this transitional year as the opportunity for us to optimize our operations, strengthen our technology platform, and upgrading our customer base to build an even stronger foundation for our future growth. As always, this forecast reflects the company's current and preliminary view which is subject to material change.

With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

[Operator]

Thank you, management. We will now begin the Q&A section. [Operator Instructions]. Our first question, Yao Lee, CICC.

[Yao Lee, CICC]

[Foreign Language]

Then now to the translation part. So the first one is about we have made capital injection last year for our micro loan license. And could you please elaborate more about how we plan to use it? Is it just a preparation for applying for the national license? Or are we actually started using it as an alternative funding source maybe in the very near future. And the second one is considering the resurgence of the COVID-19 and uncertainties in the economy. There will be some challenges especially in the loan collection and in the offline business development. So to be more specific, how are we going to dealing with the situation? Thanks.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

Hi, for two of your questions, for the first one. Yes, you are right for the 5 billion capital that we used to inject into the micro lending license. On the other hand, we also leveraged the capital at the funding resource through the channel of ADS or joint lending products, both of which can improve our leverage ratio. For your second question. First of all, we do not do the post collection through offline, the pandemic impact us only through the offline tech mark revision. Half of our loan process are conducted through online and that's a very valid limited through pandemic.

[Foreign Language]

Hope this clarifies all your questions.

[Operator]

The next question is Thomas Chong, Jeffries.

[Thomas Chong, Jefferies]

[Foreign Language]

Thanks management for taking my questions. I have a question regarding our big friend on a month-by-month basis, starting in April? And how should we think about the low end and the high-end of the guidance? And our assumption about the couple of weak trend in the coming quarters? And how should we think about the recovery in terms of the consumer sentiment in coming quarters? My second question is about how are we seeing the business trend in top and lower tier cities, given the pandemic impact more on the tier one cities? Thank you.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Alex Xu, Chief Financial Officer]

Okay. Hi, Thomas. Thanks for your question. So, from the overall business trend, we look at it. Our current assumption is that as you know that Shanghai will be gradually reopened starting from maybe June. And so we are assuming certain level of activity return to Shanghai, maybe starting next month. And we don't expect a sort of a V shaped turn around right away. I don't think that's viewed in our model. We are expecting a rather compared to say 2020 Wuhan pandemic happened, it was a V shaped turnaround, but this time we are expecting a rather slower, gradual kind of recovery after the COVID. So that's what we are building in our forecast.

In terms of tier one cities, again, the Shanghai situation is well published and, like I said, we at least according to the official media it is gradually reopening. And we expect to get some kind of a return to normal operation starting from June. For other city like a Beijing for one we -- from operational wise, we probably don't have much large exposure in Beijing. But to the Beijing situation is slightly different from Shanghai or I will say quite different from Shanghai meaning like a significant portion of the normal life in cities are still remaining. And yes, there are certain kind of a community lock downs and so on. But the situation is much better than it was in Shanghai at the peak of the pandemic last month.

And so, we are again, for this kind of situation, we obviously will closely monitoring the development in Beijing, but I don't think it will be anywhere near the Shanghai situation in terms of impact to our business or anything.

[Operator]

Next question is Alex Ye from UBS.

[Alex Ye, UBS]

[Foreign Language]

Okay. I will translate all my questions. First one is on asset quality. I think give us some color on your latest trend on day one and M1 collection rate. We were expecting them to remain stable or some deterioration in Q2. And also just want to clarify as mentioned, the expected loss will improve from 2.8% to [indiscernible] just want to confirm whether that refers to the total loan book.

And second question is on take rate and APR. What's your average APR now? And what's the current trend from now to Q2 to expect it to further decline and due expect your take rate to bottom in Q1 or may continue to hedged on? And then, all your new users that have a bit lower risk, I'm assuming they will also have a lower APR. So from a risk adjusted perspective, how does their return compared to a [indiscernible] users? Thank you.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Zheng Yan, Chief Risk Officer]

[Foreign Language]

Thank you. Okay, thank you for your question. So regarding to the vintage loss, it indicates the new transactions draw down in the first quarter and for the new customers who inquired to in the first quarter, actually the performance will be better than the new transactions in the first quarter, because we have seen the quality of our new customers that have been improved. The first question, the delinquency rate also refer to the existing loans on book and we have seen that it has been decreased in April and May, and if you check the new transactions, and it will be decreased to 3%. Regarding to the recovery or collection rate, and apart from regions like Shanghai, Beijing and Wuhan, for other regions, the recovery rate is better than April. So we foresee that the overall performance or recovery rates will be better in the second quarter. Hopefully it can clarify your question.

[Alex Ye, UBS]

[Foreign Language]

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

Yes. Starting in April, the IRR long production facilitated and originated through our platform is about 22%. In the near-term we expect this rate to remain relatively stable, we do not expect to see a big drop on APR rate.

[Alex Ye, UBS]

[Foreign Language]

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

For the new customers we acquire in the first quarter. If we only look at the short-term return, yes, compared to previous user base is relatively lower. However, we value more on the whole lifetime value that the new group users contribute a lot much better than the previous group user group.

[Operator]

[Operator Instructions]

[Alex Xu, Chief Financial Officer]

Operator, we will probably have time to take one more if any.

[Operator]

Next question is Ethan Wang from CLSA.

[Ethan Wang, CLSA]

[Foreign Language]

Just a quick follow-up question, on take rate, between narrow take rates also affected by funding cost just wandering in the cloud environment whether it depends, we have dropped in with some pressure [indiscernible]. Just want to see if management can offer more color there. Thank you.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

Yes. Ethan to answer your question, first, we do notice we have sufficient funding supply this year. We noticed funding cost declining trend. We failed, that we do not see noticeable decline actually happened. This is because in that year 2021, we have already brought down a lot of our funding cost. And next point is, we focus more on our tech business, for example, capital light, which is less impacted by funding cost.

[Alex Xu, Chief Financial Officer]

I just wanted to add a quick point there. So basically, the Haisheng means that as we expand into the large national banks, that's actually our focus shot for this year. Along the way, there will be modest drop in funding costs, but not as significant as we did in the last year or previous couple years. Because at 7% actually, we are already probably one of the best funding cost among our peers. Thanks.

[Operator]

And this is the end of the Q&A session. Now I hand back to management for closing remarks. Thank you.

[Alex Xu, Chief Financial Officer]

Okay. Thank you again, for everyone who join our conference call. If you have additional questions, please contact us offline. Thank you.

[Operator]

This concludes our conference call. You may disconnect now. Goodbye.