360 DigiTech Inc

NASDAQ:QFIN

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech Fourth Quarter and Full Year 2021 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 fourth quarter and full year 2021 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 & Director]

[Foreign Language] Hello, everyone. I'm very happy to report another solid quarter that cap-off a strong year. In 2021, total loan facilitation through our platform reached RMB357.1 billion, up 45% year-on-year. This beats the midpoint of our rate of full year guidance. In Q4, total loan facilitation reached RMB96.9 billion, up 4-0, 40% year-on-year. Outstanding loan balance reached RMB142 billion, up 54% year-on-year. Our business overcome multiple challenges related to macro economy uncertainty, through erratic outbreak of COVID and the fast changing regulatory environment in a rather volatile year of 2021. We delivered growth, while maintaining stable asset quality and further demonstrating the resilience and flexibility of our business. Now, let me walk you through some updates for Q4. Regulation remains an area that draws a lot of attention. So, let me first share some updates here. I can think of the government policy for 2022 is very clear, which is to achieve that economic growth by driving consumption, suggesting more supportive to the development of consumer finance. We expect policymakers to introduce additional measures to drive consumption and support SMEs as China's State Council has made the above mentioned policy theme as a higher priority. We then hope at the municipal level working by your plan, or the financial industry report, [indiscernible] supports the expansion of consumer finance industry through proper loosening of financing restrictions for consumer finance companies. At the central government, level PBOC has acknowledged the value of fintech is dangerous development plans for 2022 to 2025. There are tremendous opportunities for financial institutions and the tap companies to work together and contribute to the digital transformation of financial sector. In addition, the PBOC and other national regulators are promoting innovation in Financials generalization, outlined in the 14 by year plan for the financials standardization. We actively participates in policy design related discussion organized by a regulator and contribute our industry know how to support efforts. In Q4, we started to implement rectification measures, in accordance with the regulatory requirements. We have enhanced our corporate governance structure and further focused on our core business. At our recent briefing, [indiscernible] Chairman of CDIRC stated that the self-check part of rectification work has been largely completed. Overall progress of rectification has been smooth so far and are confident to complete the rectification work very well based on the regulatory guidelines and our own business needs. We increased the registered capital of our micro-lending subsidiary in to RMB5 billion. This enhanced our capabilities to serve users and managed risk going forward. We will continue our strategy on both direct and indirect loan service. On one hand, we offer loans through our micro-lending company directly to target customers and the industry. On the other hand, will work with credit agencies and help financial institutions better serve consumers. We believe that financial regulators will continue to work on the implementation of the previously released general regulatory principles such as financial service can only be undertaken with proper financial license. We will focus on the execution of the rectification plan and the regular monitoring of the progress. We are entering the late-stage of manual rectification process and the waiting for the review and certification by the regulators. In Q4, we also made progress in a few other compliance-related areas. Average API who are long facilitated through our passwords declined 2% from previous quarters, effectively brought down the cost for our borrowers. In terms of data related compliance, we continue to increase investment in data security and data protection. The China Cybersecurity Technology and the Certification Center, CCRC, awarded its security certification to our flagship product. The 360 account APP adding another national certification for privacy protection to our products. We also obtained the ISO 27701 certification privacy protection management system issued by SGS, a well-known international standard certification organization. This is the second important international standard certification in privacy and information protection area we received. Following the ISO 27001 Information Security Management System a few months ago. In addition, the Cybersecurity Measurement Bureau under the Ministry of Industry and Information Technology, MIIT, issued a written commendation of agents our excellent performance and special companion for app users privacy protection. In Q4, we also achieved excellent results in several operational areas. On the product front, our consumer loan business achieved the high quality growth throughout the year. Our SME loan product, which we launched last year do rapidly and delivered satisfactory results in Q4. Total amount of new approved the credit line for SME loan accelerated and grew by 1-6, 16% sequentially to RMB9.3 billion as of the end of 2021. The outstanding loan balance of SME loan accounted for 1-3, 13% of our total loan book. Meanwhile, we continue to refine SME products and expand to better quality customer group by offering larger ticket-size product, targeting specific SME group offline. For example, we funded our collaboration with banks to access corporate credit record. This allows us to offer bigger ticket-size credit product and attract more high quality SME borrower. Another effective approach is that we offer customized products to the tobacco and alcohol retail borrower during Chinese New Year when their funding needs surge and turnover increase. To capitalize such opportunities, we simplify approved procedures and increase direct sales for the e-commerce group. In December, credit line granted to the tobacco retail borrower acquired by our direct sales team accounted for more than 20% of total SME and the transaction volume increased by 106% on a monthly basis. Meanwhile, starting up this year, to offer differentiated service to SME and consumers and to improve efficiency, we will serve SME user through an upgraded app separate from 360 DigiTech. In addition on top of the credit service, we currently provide we will actively explore other service and products to better support SMEs business operations. In collaboration with financial institutions, we leverage our technology advantage and expanded partnership with stronger financial institution. This enabled us to further optimize the mix of our financial institution partners and establish a more balanced and resilient unknown network. Newly added financial institution partners have brought renewed coverage, strong risk management capability and the diverse business line, more over our ICE products offers passive add to better fitting the compliance requirements of some banks. This will enable us to develop standard solutions to work with more banks in the future. Meanwhile, we continue with ABS insurance in with a total of RMB1.1 billion at a collection rate of 5.7%. This brought our total ABS insurance for the full year to RMB6.5 billion, up by 282% year-on-year. Our overall ABS funding cost for 2021 was 5.47%. As for our customer base, the overall quality of newly acquired customer’s gradually improved, coming along with lower pricing. The value of those high quality customers will be gradually released over the lifecycle as price declines, we note some key indicators of user quality improved significantly, such as the ratio of user with multi-platform credit lines, user with mortgage and car loans, user with a stable income and users with tangible assets, based on the Ad [ph] group test we conducted. The drawdown ratio and return from rate are both higher or lower pricing we expect this customers will generate higher LTV as well. In Q4, we will also made a noticeable progress to enhance our tech capabilities or multiple platforms as we remain committed to become a tech empowered along facilitating step one, serving our financial institution partner and borrowers. We leverage our AI and the big DigiTech to effectively identify customer risk profiles and then match foreign needs and founding resource based massive data inputs. First, we made major upgrade to the framework AI risk management systems, this significantly improved our ability to better identify users and enlarge our processing capacity. Our average user quality was up by over 20%. Our efficiency in user acquisition was also improved by over 20%. The scale of our identifiable user base increased by threefold. Second, can we continue to make key innovations by deepening integration of AI application with our others risk management system in the areas of community detection, hierarchical federated learning and risk management strategy automation. This have strengthened our ability to identify potential borrower and major risks. Third, as for AI powered operations technology, our proprietary production diagnostic platform provides one-stop smart diagnostic service within an effort experience into automated tools. These tools ensure the stability and accessibility of our service. The platform can identify problems within 30 seconds and boost our diagnostic efficiency by 99.0%. Looking ahead of 2022, considering the macro uncertainties, we will continue to take prudent operating strategy as always from what we have learned from path to success, we believe that holding prudent and steady approach in daily operation is the golden standard. The thing happens is when macro uncertainties arise. After all the rectification again 2021, we expect to see a much clearer regulatory framework for the entire industry in 2022, which should allow industry participants to be more focused on long-term business development. We'll prioritize our technology-driven strategy and continue to invest in R&D further pursuing innovative solutions and business models for our 2B business will explore more diverse products and service for different financial institutions. Meanwhile, we will collaborate with stronger financial institutions to optimize the mix and the quality of our partnership network and ultimately to boost our services sustainability. For 2C business, we will continue to upgrade our technology and models to better identify high quality borrower and optimize our user base matrix. We will roll out more products catering to these high quality customers. This will bring higher customer LTV and retention rates as well. We will bring very positive change in our business following the Howard [ph] we did last year that we are quite looking forward to the year ahead. For our own balance sheet loan business, we have increased the registered capital of our licensed microlending subsidiary to RMB5 billion. This is a crucial strategy resource that we definitely well capitalized on. With these structural upgrades and improvements, I believe, we will serve our customers, partners and society more efficiently in 2022, making us a healthy, a more resilient and more sustainable company. This will enable us to better serve the real economy and contribute to grow our strategy for steady economy growth. Now I will turn to our CFO, Alex for more financial details.

[Alex Xu, Chief Financial Officer & Director]

Thank, you. Haisheng. Good morning and good evening, everyone. Welcome to our quarterly earnings call. As Haisheng mentioned, despite facing multiple micro challenges, we delivered solid Q4 results in both operations and financial terms, and finished 2021 with a series of record setting annual numbers on the book. During the quarter, we saw continued healthy consumer demand for credit were asset quality was fluctuating in Q4 mainly as a result of [Technical Difficulty] are glad to see improvement in the new year as funding becomes ample. Net revenue for Q4 was $4.4 billion versus $4.6 billion in Q3 and $3.3 billion a year ago. Revenue from credit driven service capital heavy was $2.71 billion compared to $2.62 billion in Q3 and $2.56 billion a year ago. The year-on-year and sequential increase was mainly due to growth in on balance sheet loans and releasing guaranty liability on previous loan balance, more than offsetting the decline in capital heavy facilitation volume and revenue take rate. The trade -- take rate decline was as expected at the average prices of our loans were lowered by 200 basis point during the quarter. Well the offsetting factors yet to kick in. Revenue from platform service capitalized was $1.71 billion, compared to $1.99 billion in Q3 and $780 million a year ago. The strong year-over-year growth was mainly driven by a significant increase in capitalized loan volume. The sequential decline was due to a decrease in capitalized loan volume along with a modest decline in revenue take rate in Q4. During the quarter, capital-light and other technology solution contribute roughly 54% of total loan volume. Capital-light loan volume was negatively impacted by seasonal shortage of overall funding supply, as well as the 24% rate cap related tightening from traditional funding sources. At least for the first half of 2022, we expect capital-light percentage contribution to our total volume to remain fluctuating around current level as an industry gradually adjust to the new rate cap. At the core of our long-term growth strategy, we will continue to pursue tech driven business model. After this transitional period in 2022, we expect capital-light to become a larger portion of our business in the long run. During the quarter, average pricing of our loan portfolio dropped 200 basis points. And by the end of 2021 average interest rate of loans on our platform were already below 24%. The 200 basis point cut in Q4 was faster than previous trajectory and we did it proactively. We believe this will give us a great flexibility in Q1 and Q2 of 2020 to be in compliance with the regulatory requirements and ultimately hit our target -- retail target by mid-year deadline. During the quarter on bended basis, average customer acquisition cost per user was proved credit line was 390 compared to 305 in Q3. As we elaborated in last quarter's earnings call, we continued to focus on attracting high quality borrowers those with much larger credit lines and the relatively low risks. The average ticket size of these customers typically run between 150,000 to 200,000 compared to average of 10,000 for our regular borrowers. The unit costs to acquire those high quality customers are justifiably much higher than the regular borrowers. So to compare things apple-to-apple, excluding large ticket-size customers in both consumer and SME markets, average costs per approved credit line of regular borrowers was approximately RMB 246 in Q4 compared to RMB 249 in Q3. As we discussed in the past, average costs per approved credit line is a calculated number with limited value in our internal decision-making process. We will continue to use lifecycle ROI and LTV as key metrics to determine the pace and scope of our customer acquisition strategy. Throughout 2021, we have maintained healthy ROI and our LTV trend, which in turn drives stable net take rates. As overall risk metrics fluctuating in Q4, we continue to take prudent approach in booking provisions against potential credit loss. New provisions for contingent liability for loans originated in the quarter was approximately RMB 1.6 billion. Meanwhile, approximately RMB 400 million of provisions from contingent liability of previous period loans was written back as actual performance of those loans was better than expected. Effective tax rate for Q4 was approximately 14.8%, which brought full year ETR to approximately 17.3%. Going forward, we expect ETR to normalize to around 15%, which will be sustainable in the foreseeable future based on current tax planning schedule. With strong operating results and stable contribution from capitalized model, our leverage ratio, which is defined as a risk-bearing loan balance divided by shareholders' equity remain at a historical low of 4.3 times in Q4 compared to 6.6 times a year ago. We expect to see rather stable leverage ratio for the time being until capitalized contribution zoom growth in the future. We generated RMB 2 billion cash from operation in Q4, compared to RMB 1.8 billion in Q3 and RMB 1.2 billion a year ago. Total cash and cash equivalent was RMB 9.6 billion in Q4, compared to RMB 7.6 billion in Q3. Non-restricted cash was approximately RMB 6.1 billion in Q4 versus RMB 4.2 billion in Q3. A meaningful increase in cash was in part due to the timing of the registered capital increase for our micro-lending subsidiary, which results in large cash balance sitting in bank accounts at the year end, as opposed to being deployed in normal course of a business. As always, a significant portion of our cash would normally be allocated to support on-balance-sheet loans and security deposit with our institutional partners. As we continue to generate healthy cash flow from operations, we believe our current tax position is sufficient to support the growth of our business to invest in key technologies, to satisfy the potential regulatory requirements and to return to our shareholders. If you’ll recall, our Board of Directors approved a quarterly dividend policy in Q3, allowing us to distribute approximately 15% to 20% of quarterly net income after tax in the form of cash dividends on a recurring basis. In accordance with this dividend policy, we declared another quarterly dividends of US$0.26 per ADS for Q4, this cash dividends represent approximately 20% of our Q4 earnings. Finally, let me give you some update about our outlook for 2022. As we communicated to the market previously, we believe 2022 will be a transitional year for the industry as the participants are adjusting to a new regulatory settings as well as some micro uncertainties. As such, we expect total loan volume for the year to be between RMB 410 billion, RMB 450 billion representing year-on-year growth of 15% to 26%. This transitional year as an opportunity was to optimize our operation, strengthened our technology platform and upgrading our customer base, to build an even stronger foundation for future growth. As always, this forecast reflects the company's current and preliminary views, 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. For those who can speak Chinese, please kindly ask your question in Chinese first, followed it by English translation. In additional, in order to have enough time to address everyone on the call, please keep to one question and one follow-up and then return to queue if you have more questions. Thank you. [Operator Instructions] Our first question is Yao Lee from CICC. Please go ahead.

[Yao Lee, CICC]

[Foreign Language] Okay. That was a good translation. The first one is, I'd like to know the progress of the pricing adjustments. What's the proportion of loans in Tokyo 2021 that are priced under the 24%? And how much this proportion can reach up to for the first quarter this year? And wonder pricing going downward and the target customers sort of get shocked. I was wondering how are we shifting our customer acquisition strategy. Thanks.

[Alex Xu, Chief Financial Officer & Director]

Sure. Thanks, Yao. I would -- I would take the first part of the question and then Haisheng will do the second part. So in the first quarter, over 70% of our customers are priced below 24%. And as I mentioned in the prepared remarks, by year ending, the average price is already below 24. And this quarter in Q1, we're expecting even larger portion of customers being priced that below 24. And we are pretty confident that we will get the targeted rate cut goal, by the mid-year headline. Haisheng?

[Wu Haisheng, Chief Executive Officer & Director]

[Foreign Language] Yes. Let me try for our CEO, as four questions the customer acquisition strategy to access the higher quality customer groups. We will navigate three approaches. Number one, further invest more in R&D to improve our Tech as in light AI models to better identify the customer risk of profiles. What is the roadmap in Q4? They can approach. We adapt our API, customer acquisition approach with our capital enhancement study. We learned offline trend which historically shows is a much better approach is especially for the high quality customers.

[Operator]

Our next question is Richard Xu from Morgan Stanley.

[Richard Xu, Morgan Stanley]

[Foreign Language] Basically, my question is on the funding front, there's been increasing in ADS also the small loan company. Capital injection that's also completed should want to see whether there's a credit line with banks where cooperation with the banks is still expanding. And what will be the long term mix in terms of the funding between capital lights, capital heavy and then their different funding sources?

[Wu Haisheng, Chief Executive Officer & Director]

[Foreign Language] Yes. To answer your question, Richard, you are very correct. First, we -- well, it continuously expands our number of financial institution partners by introducing stronger banks. As this comes along, we can offer larger ticket size to better quality customers. Second, as for the capital light volumes, we will explore more diverse products catering to different needs of financial institutions. Their needs include marketing surveys, risk management surveys and loan collection surveys.

[Alex Xu, Chief Financial Officer & Director]

I just want to add one point. So from a longer term perspective, the capitalized contribution, as I mentioned in the prepared remarks, will be moving higher from current level. If you recall, in the past, we were at some point targeting like two-third or 70%. I think from a longer term perspective that's probably still be the target. This year will be fluctuated around this current level, just because the whole industry is adjusting to the new environment. And when we’re done with this adjustment, the trendline will start to move to the higher direction for cap light.

[Operator]

Our next question is, Ethan Wang, CLSA.

[Ethan Wang, CLSA]

[Foreign Language] Okay. I have two questions. Firstly, is a quick follow-up just wondering the funding cost for the fourth quarter and the management view on funding costs for this year? And second question is down in the market concern on tightening regulation for the local financial institutions or causing financial institutions. And so for the regional banks who are collaborating, just wondering whether they are having concern on this front, and whether that's going to empower business and for guaranty companies does that mean there were set up various institutions across the country, so we can cooperate with them to lend nationwide? Thank you.

[Alex Xu, Chief Financial Officer & Director]

Okay. Thank you, Richard. I will take the first part again and then Haisheng will be taking care of the second one. So for the funding costs for the Q4, it was approximately 7%. And the Q4 as you know, it's always been a very tightening period from money supply perspective in the financial system. So normally that's reflecting the funding costs. And for moving into this year, as we sort of gradually transition to new institutional partners, the overall funding supply, we're getting more sufficient. But during this transitional period, we are expecting a rather stable funding cost around 7% and after we've done with this transitional, we'll probably start to see a gradual although modest, kind of decline in funding cost in the long run.

[Haisheng Wu]

[Foreign Language] Yes, yes. To answer your question number one, your question comes from the very early requirement that the online loan business for urban commercial banks. This is quite early regulation and the regulator gives a rather long grace period for all the market participants. The cutoff date issue is January 1 this year. Currently, all our financial institution partners are within the compliance. Secondly, looking at the matrix of our financial institution earnest [ph] network, most of them are national wise operations. Therefore, we have very limited impact from this regulation. Yes. The second part of your question the regional restriction for guarantee company, guarantee company can stack local branch national wise to satisfy these requirements. It's comparatively easy compared to the banks to cover national wise.

[Ethan Wang, CLSA]

Thank you.

[Operator]

Our next question is Thomas Chong from Jefferies.

[Thomas Chong, Jefferies]

[Foreign Language] Thanks management for taking my questions. I have two. My first question is about other SME strategy. Can management comments about how we should think about the contribution over the future as well as the borrowing cost and the loan size going forward, together with the industry categories that we are working with? And my second question is more about the macro headwinds that we are facing these days, an effect of COVID. Are we seeing any changes in terms of the consumer behavior, in terms of the use of the policies? Thank you.

[Haisheng Wu]

[Foreign Language] Well, first regarding your question about SME business, the average ticket size for SME products overall is about RMB50K, five-zero, for some tax laws, which is larger ticket size, usually we provide products over RMB250K. For the tax law, we estimate the market expanded around 2%. Secondly, for your question about the use of loan, as most of our consumers were in the industry that are less impacted around the COVID and the macro economy, we are seeing their use of loan is consistent with previous. I want to add more color for our operating strategy for SME business line even under the tremendous demand for any borrower and the supportive part from government; we take a very prudent strategy in this business. We focused on those industries that are less impacted by the macro economy such as manufacturing and retail. This year, we do not expect to accelerate exponentially in this business, again, we will take very conservative role. Also we like to explore more capital life and the more tech driven solutions for financial institutions in this SME business.

[Thomas Chong, Jefferies]

Appreciate it.

[Operator]

Thank you. This is the end of our question-and-answer sections. Now I give it back to the management for closing remark. Thank you.

[Mandy Dong, Investor Relations Director]

Okay. Thank you for -- again for participating in the call, and if you have any additional questions, please contact us offline and we'll discuss that. Thank you.

[Operator]

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