360 DigiTech Inc

NASDAQ:QFIN

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech Fourth Quarter and Full-Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Ms. Karen Ji, Senior Director of Capital Market. Please go ahead, Karen.

[Karen Ji, Senior Director of Capital Market]

Thank you, operator. Hello, everyone, and welcome to 360 DigiTech's fourth quarter and full-year 2022 earnings conference call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Wu Haisheng, our CEO; Mr. Alex Xu, our CFO; and Mr. Zheng Yan, our CRO.

Before we start, I'd like to refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make certain forward-looking statement.

Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP measures to GAAP measures. Also, please note that unless otherwise stated, all figures mentioned in this call are in RMB terms.

Now I'll turn the call over to our CEO, Mr. Wu Haisheng. Please go ahead.

[Wu Haisheng, Chief Executive Officer]

Hello, everyone. Thanks for joining our Q4 2022 earnings conference call. On the macro environment front, we experienced a volatile quarter in Q4, swinging from widespread grounds across China in October and in November to the border reopening and the cancellation of almost all COVID-19 restrictions in December. This concluded nearly three-year period of strict COVID control policies in China. Regulatory authorities also announced that the rectification of financial business within the major Internet platform companies has been mostly completed.

At a meeting held on February 27, 2023, the China Banking and Insurance Regulatory Commission, CBIRC, called for proactive coordination between financial, fiscal, and social policies to provide greater support for the growth of private consumption and domestic demand in China. The financial market department of the People's Bank of China, PBOC, also pledge to facilitate a healthy development of the platform economy in three ways, including speeding up the rectification of the remaining minor issues with some Internet platform companies, improving standards for regular supervision and developing financial measures to support the sustainable healthy development of the firm economy. Our industry is therefore headed in a more positive direction.

As of the end of Q4, we have partnered with a total of 143 financial institutions for our loan facilitation business. Total loan origination and facilitation volume was RMB104.6 billion, up 8% year-over-year. As of the end of Q4, cumulative number of users with approved credit lines reached approximately 44.5 million, and cumulative borrowers with successful drawdowns reached approximately 27 million, up by 16% and 11% year-over-year, respectively.

In last Q4, China implemented its most extensive COVID control measures since 2020. While in December, the government adjusted its COVID policies and a massive wave of infections subsequently occurred across China. Given the uncertainties posed by both the COVID and the initial period of reopening, we tightened our customer acquisitions and credit assessment policies in Q4.

These together with the optimization of our user base have helped improve our day-one delinquency rate from 4.5% in Q3 to 4.3% in Q4, the lowest level since 2018. Despite the volatility in our 30-day collection rate due to the COVID resurgence, our overall risk performance remained stable. With our user base upgraded, our pricing also stabilized. The average IRR of the loans are originated and facilitated during this quarter was flat sequentially.

We scaled back our marketing efforts, given our concerns about the credit risk associated with the COVID. Meanwhile, we continue to upgrade our ICE model and improved our capabilities and efficiencies to acquire targeted users. In Q4, the acquisition cost per new user with the credit lines decreased by approximately 24% sequentially. We further expanded and diversified our customer acquisition channels by working with different types of traffic platforms, including short- and long-form video, social media, search engines, and food delivery platforms, et cetera.

In terms of cooperation with financial institutions, liquidity remain ample in the financial systems during Q4, leading to strong demands for high-quality assets by financial institutions and the further reduction in our funding cost. As of the end of Q4, we had established long-term partnerships with 143 financial institutions, including over 10 joint-stock banks and major urban and rural commercial banks with more than RMB1 trillion, allowing us diversified funding sources.

Our funding cost decreased by roughly 20 basis points sequentially. For ABS issuance, we issued RMB1.8 billion in Q4 at an average funding cost of 5.4%. There was some unusual level of volatility in the bond market in the quarter. Whereas some industry peers cancelled ABS issuance on a large scale, we continue to issue at a relatively stable price.

We also made steady progress on the credit agency reform, namely Duanzhilian in Q4. As of December 31, 2022, we had substantially completed the system integration with our financial institution partners under Duanzhilian in accordance with our plan submitted to the regulator to ensure our practice comply with the new rules. Our loan facilitation process with these partners remained stable in terms of both credit approval rate and key risk metrics.

Given the macro challenges and COVID countermeasures, China's consumer finance and SME credit markets face headwinds on both the demand and risk grounds in 2022. Against this backdrop, we stick to our prudent operating strategy and leverage technology to drive quality growth. In 2022, total loan origination and facilitation volume was RMB412.4 billion, up 15.5% year-over-year and in line with our guidance at the beginning of the year. We made solid progress in optimizing our user base, allowing us to weather the macro headwinds and stabilize our asset quality. Our day-one delinquency rate decreased by more than 1 percentage point to 4.3% in Q4 from 5.4% in the same period last year, highlighting the resilience of our business.

In light of the volatile macro environment, we kept the percentage of loans originated and facilitated under our capitalized model, ICE and other tech solutions relatively stable at roughly 56% in 2022. These business models have provided us with more flexibility and [means] to balance risks. We also maintained disciplined cost control and optimized our operational efficiency during the year. As such, we achieved our targeted net take rate for our baseline business despite the decline in loan pricing.

We remain committed to fulfilling our social responsibilities as we operate our business. In 2022, we served a total of 910,000 self-employed individuals and 1.08 million business owners, supporting about 6 million jobs. Given the gradual resumption of economic activity since the start of 2023, we have seen a modest recovery in credit and a notable improvement in our asset quality. Our day-one delinquency rate in February decreased further to 4.1%, while the 30-day collection rate quickly recovered to last Q3 level, showing a faster than expected improvement in our risk performance.

Now let me share with you [indiscernible] for 2023. First of all, the continued reduction in our credit costs and funding costs has created favorable conditions for us to better serve our users. We have approximately 44.5 million cumulative users with approved credit lines. How to effectively convert them into borrowers and increase the credit utilization of our existing borrowers will be crucial to drive our overall growth. To enhance our engagement with inactive users, we will step up our marketing and outreach efforts while optimizing our product mix and risk control strategies. We will also seek to improve our user retention rate for existing borrowers by refining our operations to offer them with the products and user experience that better serve their needs.

We will continue to diversify our customer acquisition channels. We have already established a clear competitive edge in the customer segment with borrowing cost from 18% to 24%. Meanwhile, there are many traffic platforms that have large diverse user bases, but lack the expertise to engage with users in our target segments. As we adjust our overall loan pricing to below 24%, our embedded finance business will be able to cover more leading traffic platforms. We expect more strategic partnerships to be launched later this year.

We will explore market opportunities to serve a broadly defined SME segments including SME, SME owners, entrepreneurs, self-employed individuals, et cetera. Public data shows consumer demand in certain sectors has recovered quickly since the Chinese New Year. The recovery in private consumption will improve the credit demand and the repayment ability of the broadly defined SME segment. To capitalize on these opportunities, we will develop targeted products to better serve their credit needs. Approximately, 30% of our current user base are broadly defined SMEs whose outstanding loan balance only accounts for roughly a little bit higher than 30% of the total. This leaves substantial room for growth.

In terms of the tax solution business, we operated this in our [indiscernible] financial institution through our end-to-end technology solution. This will enable us to generate more risk-free revenue, serve a greater number of high-quality users with lower pricing through our bank partners, and expand our total addressable markets. This year, we will focus on extending the depth of our tech solution services to improve our take rate. With these services in place, we believe that our tax solution business [indiscernible] loan volume on the revenue.

Finally, I would like to conclude my prepared remarks with a small thought. Our company is very young, having only been around for over six years. The sector that we are in is also at the very early stage of its lifecycle. Our team is young and motivated and our initial entrepreneurial dream has just begun to materialize. We decide to deliver far more brilliant results than what we have achieved today. We believe that 2023 will be a good year for us, thanks to the supportive government policies and the recovering macro economy combined with our strong strategies and unique positioning.

Although the macroeconomic rebound has not been very robust so far in the first quarter, we have great confidence that 2023 will be a year of growth. As we continue to improve our risk performance, expand our customer acquisition channels, optimize our funding costs and improve our services to broadly define SMEs, we expect a fruitful years ahead.

With that, I will now turn the call over to our CFO, Alex Xu, who will walk you through with our financial results for the quarter and the full-year.

[Alex Xu, Chief Financial Officer]

Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our fourth quarter earnings call. As Haisheng discussed earlier, we delivered another strong quarter in the very challenging macro environment. COVID outbreaks and the restrictions created additional headwinds for our operations during the quarter, particularly in December. However, since the reopening in early January, we have experienced some modest pickup in demand for consumer credit with asset quality noticeably improving.

In Q4, we continue to target higher quality and lower risk user base and drive further improvement in user quality despite significant macro uncertainties. Key leading indicators day-one delinquency has been on a steady declining trend throughout 2022. It was 4.3% in Q4 versus 4.5% [indiscernible] and further declined to approximately 4.1% in February. To this day, the declining trend continued on the [indiscernible]. The continued improvement in day-one delinquency reflects the user based upgrade and macro improvement in the new year.

30-day collection rate was 84.7% in Q4 versus 86.4% in Q3. This [indiscernible] of our collection operations and the deterioration of consumer confidence following the timing COVID restriction in November and the surge in COVID cases in December. As the COVID cases peak in late December and the reopening progressed by early February 30 day collection rate has quickly recovered to above the Q3 level. Total net revenue for Q4 was $3.9 billion versus $4.1 billion in Q3 and $4.4 billion a year-ago. Revenue from credit-driven service capital heavy was 2.8 billion in Q4 compared to 2.9 billion in Q3 and 2.7 billion a year-ago. The slight year-on-year growth was mainly due to growth in on-balance sheet loan volume as we achieved better utilization of our micro-lending license.

This solid performance was more than enough to offset decline in average pricing of the loan and the decrease in off-balance sheet facilitation volume. Off-balance sheet facilitation revenue take rate declined sequentially due to an adjustment in early repayment. On a year-on-year basis, the take rate declined slightly despite significant price cut.

Revenue from platform service capital light was RMB1.1 billion in Q4 compared to RMB1.2 billion in Q3 and RMB1.7 billion a year-ago. A year-on-year decline was mainly due to decrease in volume and average prices of capital light loan facilitation. Q4 and full-year 2022 capital light loan facilitation, ICE and other technology solutions combined account for roughly 56% of total loan volume.

As macro conditions gradually improved in 2023, we will try to strike an optimal balance between risks, growth and profitability. As such, contribution from capital light, ICE and other technology solutions will likely be range bound in the near-term. In the long run, we will continue to pursue tech-driven business model while seeking a balance among various forms of non-risk-bearing solutions based on macroenvironment and operational conditions.

During the quarter, average IRR price of the loans we originated and/or facilitated remain stable Q-on-Q well within the regulatory rate cap requirements. Looking forward, we expect pricing to be relatively stable for the coming quarters. Sales and marketing expenses decreased by approximately 34% sequentially in Q4. During the quarter, we lowered the pace of new user acquisition as we focus more on existing users engagement given the extremely challenging macro conditions.

We added approximately 1.5 million new credit line users in Q4 compared to approximately 1.7 million in Q3. Unit cost to acquire a new credit line users declined approximately 24% sequentially. The declined customer acquisition costs mainly reflect our continued effort to drive efficiency in our operation as well as the soft demand in muted economic activities.

As macro condition gradually improved in 2023, we may also adjust the pace of the new user acquisition along the way. Meanwhile, re-energizing existing user base will continue to be a main driver for our growth. As always, we will continue to use lifecycle ROI and LTV as key metrics to determine the pace and scope of our user acquisition strategy to ensure the sustainability and the profitability of our operations.

Overall, risk profile of our loan portfolio remains stable in Q4 as increased contribution from new loans from high quality borrowers, offsetting negative impacts on old loans by macro uncertainties. Although macro condition appears gradually improving, it may still take some time to reflect in the consumer's behavior. As such, we continue to take a prudent approach in booking provisions against potential credit loss.

Total new provisions for risk-bearing loans in Q4 were approximately 1.7 billion and the write-backs of previous provisions in the quarter were marginal. Provision coverage ratio, which is defined as total outstanding provisions divided by total outstanding delinquent loan balance between 90 and 180 days, or 456% in Q4 compared to 406% in Q3. With solid operating loss and stable contribution from capital light models, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders equity, was at a historical low of 3.5x in Q4 compared to 4.3x a year-ago. We expect to see rather stable leverage ratio for the time being until capitalized contribution resume growth in the future.

We generate approximately RMB1.8 billion cash from operations in Q4 compared to RMB1.6 billion in Q3. The sequential increase in operating cash flow was mainly driven by better working capital management. Total cash and cash equivalent was RMB10.9 billion in Q4 essentially flat Q-on-Q. Non-restricted cash was approximately RMB7.2 billion in Q4 also flat sequentially.

In the last few quarters, we took more conservative approach to deploy our cash in day-to-day business, mainly due to macro uncertainties. As economic conditions improves, we may look for opportunities, deploy resources to launch new initiative, develop new technology and expand service offerings.

Non-GAAP net profit was RMB919 million [indiscernible] net income for 2022 was RMB4.21 billion. As we continue to generate healthy cash flow from operations, we believe our current cash position is sufficient to support our business development and to return to our shareholders. In accordance with the dividend policy approved by our Board, we declared another quarterly dividend of US$0.16 per ADS for Q4.

Finally, regarding our outlook for 2023. 2022 was an extremely challenging year in terms of macro conditions where we start to see tentative sign of economic recovery in the new year, the lingering economic impact from the past on consumer confidence and behavior may still last for a little bit. At this junction, we see modest recovery in consumer credit demand with gross rate potentially accelerating throughout this year. As such, we expect total loan volume for 2023 to be between RMB455 billion and RMB495 billion, representing year-on-year growth of 10% to 20%. As always, risk 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]

[Operator Instructions] First question comes from the line of Judy Zhang from Citi. Please go ahead.

[Judy Zhang, Citi Research]

[Foreign Language] I will translate my question. So thank you management for giving me the first opportunity – like to ask a question, like a first place. And my questions regarding the credit demand. How significant the credit demand recovering? Do you see things that are reopening? And what's the main reason for not seeing a strong recovery? And also we said – we saw the management give a relatively conservative loan origination of growth guidance for this year, which is like 10% to 20% year-on-year growth, which is just below the loan volume growth guidance like last year, which is 15% to 25% year-on-year growth. What's the key reason behind? Thank you.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

Thanks, Judy. In terms of the credit recovery, actually, we have seen some surge of consumer behavior recovery right after the reopening. And we also see a modest recovery in credit. But if we look at different sectors, we have seen some sectors leading the recovery, for example, the restaurant and the tourism. But some of the industries are lacking behind. So we believe it takes some time for the outlook for employment and personal income to eventually benefit from the recovery of consumption and boost the credit demand recovery. So it's not right now for the credit demand to recover from the – to have immediate recovery for our credit needs. And although the recovery in credit needs is not so robust in the [indiscernible] Q1, we believe the Q2 and Q3 will be better.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

In terms of our guidance, actually we are a company sticking to our promise. We won't allow the situation. We cannot deliver our promise. Even in the extreme situation in last year, we still stick to our initial – the guidance in the beginning of the year, and actually we delivered that. So in terms of the guidance for this year, we think it's within the market expectation, and we take – tend to take a prudent view for the pace of our loan volume growth in this year. And we believe if the market situation, the macro economy improved further in later this year, we will also adjust our – the growth pace. And we believe this year will be – for the loan volume and the growth rate will be gradually ramping up in the year. And this year will be a good year for us. Hope this answer your questions, Judy.

[Operator]

Thank you for the questions. [Operator Instructions] Next question, we have the line from Yada Li from CICC. Please proceed.

[Yada Li, CICC]

[Foreign Language] Then I will do the translation. Hello, management. This is Yada from CICC and thanks for taking my questions. During the COVID pandemic, we noticed that you paid more attention to the operation of the existing users in terms of the customer acquisition side, and therefore the new loan sales were partly from the premium existing users. And I was wondering if the marketing budget will increase in 2023 and 2024, what kind of customer acquisition strategy will you adopt in the future? And what are the main factors that determine whether to increase the marketing budget? That’s all. Thank you.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

Thanks, Yada for your question. So I want to highlight the major growth driver for our business. Actually, we have over 40 million users with approved credit lines and over 20 million borrowers. So you can see that we have over 20 million users who never borrowed the money from us. In terms of new customers, actually we have 3 million to 4 million new customers acquired basically every year. So it's very crucial for us to spend more time making more efforts in terms of engaging our existing users. And we believe this will be a major driver for the growth of our business in the future.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

From a marketing budget perspective, actually we allocate budget to existing users and new users. For existing users, we will spend money to reach out to them and use some offers to call back them, use some better offers to call them back to and we'll also improve the user experience of those broadly defined SME borrowers to keep them active on our platform. So we will keep our budget for the engagement of all the existing users.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

Okay. For the new users, we will expand our network to cooperate with more platforms in terms of the embedded finance business model because our pricing is already below 24%. So it brings us opportunities to connect with more quality platforms to serve a larger number of customer base. So in terms of the market spending, considering the recovery – credit needs recovery in terms of the user's activeness, actually we will – first, we'll prioritize our work to increase the credit utilization for those new users first and then we will consider to expand our marketing, expanding to acquire new users. Hope it clarifies your question.

[Operator]

Thank you for the questions. [Operator Instructions] Next question, we have the line from Thomas Chong from Jefferies. Please go ahead.

[Thomas Chong, Jefferies LLC]

[Foreign Language] Thanks management for taking my questions. My question is about competition. Going into the future, in terms of the pricing side, how should we think about the competition with friends or social media? Thank you.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

First of all, we think we are quite differentiated from the traditional banks and large Internet platforms in terms of the pricing. Actually we enjoy a absolute competitive edge in terms of serving the pricing segment between 18% to 24%. So we don't believe that we will have a head-to-head competition with those large platform or traditional banks. On the contrary, we think we can provide additional value to them by cooperating with those platforms.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

So because of this differentiation points, we realized that a lot of Internet giant's platforms, they want to expand their outreach to different type of customers. So because of our core competence can help them to expand their customer base and increase their credit product, the loan volume to serving their credit product to their users. So we believe this is what we can – the additional value can provide to those platforms. Yes. I hope this answer your questions, Thomas.

[Operator]

Thank you for the questions. Next question comes from the line of Hans Fan from CLSA.

Please go ahead.

[Hans Fan, CLSA]

[Foreign Language] So this is Hans Fan from CLSA. I got question related to the loan outlook, because the management was mentioning about the – this year is going to be a better part in the second half. So I was wondering that what's the sort of lending pace across different quarters. And also in terms of the split between capital heavy and platform services, how do we think about the split this year? Do we have a target for the split in the longer run? Thank you very much.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

In terms of the quarters [indiscernible] pace, we expect it will ramp up throughout the year, which means the loan volume will grow quarter-by-quarter because we believe the credit needs will benefit from the recovery of the consumer's behavior. So the loan volume in second half of this year will be increasing compared to the first half.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

Okay. In terms of the contributions from our asset light or the platform service business model. First of all, we believe this – our long-term strategy to develop our platform service business model because we always position ourselves as a fintech company. So in the long run, we believe the loan volume contribution from the capital light will further increase. But if we look at the short-terms, we will actually adjust to the loan volume contribution from the asset light business model based on our assessments of the macro environment and credit risk associated with the macro.

In terms of – and we want to – we will adjust the contribution to balance the risk and the profitability of our business. We believe this year will be a stable year, and we want to achieve a healthy profitability for our business. So this will be overall judgment. We expect the overall contribution from the capital light business will remain stable in this year. But in the next step, we will better develop our tech solution business because it's a pure tech business model. So as our customer base grow, our loan volume will also increase, and we expect the contribution from the capital light or platform service will further increase in the future.

[Alex Xu, Chief Financial Officer]

Hans, I just want to add a couple points regarding the gross rate for this year. We noticed that in the recent few days, some of the companies related to consumer market report their earnings. They gave a pretty – somewhat disappointing outlook for the first quarter in terms of year-over-year growth. And we look at it – although last year Q1 was a relatively normal quarter, meaning there's not really much disruption in operations in the last year's Q1, the comp is not that easy. But even with that kind of a not so easy comp, we are expecting year-over-year growth in terms of volume [indiscernible] of this year. And then along the way, as we move forward for the remainder of the year, as Haisheng mentioned, we may see gradual acceleration of growth quarter-by-quarter on the year-over-year basis. That's a point I want to add. Thank you.

[Hans Fan, CLSA]

Got it. Thank you.

[Operator]

Thank you for the questions. In the interest of time, we'll now take the last question. [Operator Instructions] Lastly, we have the line from Alex Ye from UBS. Please go ahead.

[Alex Ye, UBS]

[Foreign Language] I'll translate my question. I have a two follow-up on your loan guidance for this year. So if we look at the midpoint of your guidance of 15%, can we ask what are the underlying assumptions here? For example, would you still frame the consumer credit recovery as the modest one? And do you need to increase your risk appetite in order to achieve this newborn target? And secondly, for the higher end of your target at 20%, I'm just wondering, what are the things or data point you need to see for you to be more comfortable to go forward to that higher end and what are the drivers? Thank you.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

Okay. I will pass this question to our CRO, Zheng Yan.

[Zheng Yan, Chief Risk Officer]

[Foreign Language]

[Karen Ji, Senior Director of Capital Market]

Okay. From risk appetite perspective, we will take a prudent credit assessment approach in this year, so we can see the further improvement in our risk performance in 2023. For example, our day-one delinquency rate in February has come down to 4.1%. And the 30-day collection rate, also recovered to a level – the highest level in last year, in February, and we believe in March, those two indicators will further improve. So in this year, overall risk performance will be better than last year.

Our guidance is based on the assumption that the recovery of the macro environment will improve the outlook for the employment and the personal income and eventually benefit the credit needs recovery. And at the same time, we believe, there is assumption that our risk performance will continue to improve down the road. So this year, if the things getting better, then all the recovery of the credit needs and the risk performance accelerated in this year, we will also consider to adjust our growth pace. This is our answer.

[Operator]

Thank you very much. With that, I'd like to hand the call back to the management for closing.

[Alex Xu, Chief Financial Officer]

Okay. Thank you, again, everyone for joining us for the meeting. And if you have additional questions, please feel free to contact us offline. Thank you. Bye-bye.

[Operator]

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.