FinVolution Group

NYSE:FINV

Earnings Call Analysis

Strong International Growth and Financial Improvements

FinVolution Group ended the first half of 2024 positively, with notable growth in both the China and international markets. Transaction volumes in China increased by 6% year-over-year to RMB 92.5 billion, while international markets soared by 32% to RMB 4.5 billion. Net income rose by 4% sequentially to RMB 551 million, and the company saw significant improvements in funding costs and loan collection efficiency. FinVolution's international expansion, particularly in Indonesia and the Philippines, is expected to continue its momentum, with operations in these markets projected to become profitable by 2024 and 2025 respectively. The company remains confident in its strategic direction despite macroeconomic challenges in China.

Navigating Through Economic Challenges

The earnings call of FinVolution Group for the second quarter of 2024 indicated resilience amid China's persistent macro challenges. The company opened by highlighting a cautious optimism, with China's GDP growth reported at 5% in the first half of the year, despite consumer sentiment remaining shaky. Although some sectors like tourism showed signs of revival, overall retail sales in China only grew by 2% year-over-year as of June, pointing to a slower recovery. The manufacturing PMI remained stable, hinting at a gradual recovery but signaling that hurdles still exist, especially in consumer confidence.

Strong Performance Metrics

In the first half of 2024, FinVolution demonstrated promising results. Transaction volume in China increased by 6% to RMB 92.5 billion, while international markets saw a dramatic 32% rise, peaking at RMB 4.5 billion. The growth in the international segment underscores a successful execution of the company's global expansion strategy, particularly in the Philippines and Indonesia. The number of new borrowers reached approximately 823,000, up 22% year-over-year, showcasing effective customer acquisition despite market pressures.

Positive Trends in Funding and Collection

A crucial highlight from the call was the improvement in funding costs, which declined by 90 basis points in the second quarter and 114 basis points cumulatively in the first half of 2024. The average borrowing rate stabilized at 22.2%, indicating robust demand for the company's services. Risk management seemed to yield positive results as well, with the day 1 delinquency rate dropping by 10 basis points to 5.1%. The loan collection recovery rate also improved to 88%, up 200 basis points sequentially, signaling enhanced efficiency in operations.

Looking Forward: Growth Projections

FinVolution forecasted that their Indonesia operations would become profitable in 2024, with an expectation of resuming growth of over 10% in the third quarter. In the Philippines, transaction volume remarkably surged by 140% year-over-year in Q2 to RMB 674 million, representing 29% of international transaction volume. The company is also adapting its pricing strategy and credit risk models, which has resulted in stabilized operations with potential for increased market share.

Commitment to Shareholders

A strong focus on returning capital to shareholders was emphasized, with a cumulative share repurchase of approximately USD 337 million and dividends totaling USD 325 million since 2019. The payout ratio was highlighted as reaching 49% of net profits in 2023, signifying a robust approach to investor returns. The company intends to continue enhancing its capital return program while simultaneously pursuing growth opportunities across diverse markets.

Summary of Strategic Intent

In summary, FinVolution's Q2 results portray a resilient enterprise executing a clear growth strategy amidst macroeconomic headwinds. Their commitment to improving operational efficiencies, alongside a robust risk management framework and steady capital return approach, positions them advantageously as they aim to enhance market share and shareholder value in a dynamically changing financial landscape.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, ladies and gentlemen, thank you for participating in the Second Quarter 2024 Earnings Conference Call for FinVolution Group. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I would now like to turn the call over to your host, Jimmy Tan, Head of Investor Relations for the company.

[Jimmy Tan, executive]

Hello everyone, and welcome to our second quarter 2024 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company's e-mail alerts by visiting the IR section of our website at ir.finvgroup.com. Mr. Tiezheng Li, our Chief Executive Officer; and Mr. Jiayuan Xu, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session.

During this call, we will be referring to several non-GAAP financial measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today.

Further information regarding this and other risks and uncertainties are included in the company's filings with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Finally, we post a slide presentation on our IR website, providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Tiezheng Li.

[Tiezheng Li, executive]

Hello everyone, and thank you for joining our earnings call. This is Tiezheng Li, CEO of FinVolution Group. We are happy to speak with you today. We ended the first half of 2024 on a positive note, driving progress growth in the China market while maintaining our rapid growth momentum internationally through determining strong execution of our local excellence, global outlook strategy, or simply L-E-G-O legal strategy. We made great strips across our business in the markets in which we operate. Cumulatively, we have served around 31.5 million borrowers across China, Indonesia and the Philippines as of June 30, 2024.

During the first half of 2024, transaction volume for the China market reached RMB 92.5 billion, up 6% year-over-year. Transaction volume for international market continued to grow rapidly, soaring to RMB 4.5 billion, up 32% year-over-year. In terms of outstanding balance, China reached RMB 64.2 billion, while our international market slowed to RMB 1.4 billion, up 3% and 27%, respectively, year-over-year. This later performance lends out as a testament to the effective execution of our legal strategy and the embedding commitment of our team. Customer acquisition is a key element of our legal strategy. We view it as an ongoing investment that will ultimately lead to a higher percentage of brighter quality, repeat borrowers and drive sustainable growth.

During the second quarter, our number of total new borrowers reached [823,000], up 22% year-over-year and 15% sequentially, validating our ability to build our business across different countries. Notably, as we completed the transition to better quality borrowers in Indonesia and began to diversify our business model. The percentage of new international borrowers was again surpassed the percentage of new China borrowers. Furthermore, our number of new borrowers in the Philippines continue to grow robustly in the second quarter, increasing by 198% year-over-year and [ 69% ] sequentially. Our effective social media strategy in the international markets also continues to yield positive outcomes. As of the end of the second quarter, our followers on leading social media platforms such as Facebook, TikTok and Instagram had risen to approximately 1.3 million, 850,000 and 240,000, up 41% and 30% and 8% year-over-year, respectively. Validating the strong brand awareness of deep localization we have created in our overseas market.

As a fintech leader, technology is deeply ingrained in our DNA. It remains at the core of our business and our primary competitive edge. During the second quarter, we hosted an internal type competition called [indiscernible] bringing together 60 R&D teams for a 36-hour session in a closed door environment. [indiscernible] project included admin AI bots, which can incorporate API function cause into large language models. Its framework can also be expanded to include multiple internal tools and support the management of different tools across platforms. Another standard [ e-slot ] leveraged AIGC to utilize fragmented time slots to increase productivity.

We believe these projects demonstrate great implementation potential for enhancing our operations and overall efficiency. Next, I'd like to share some updates on our ESG progress. We recently published our 2023 ESG report, the sixth in our company's history, highlighting our dedication to transparency and sustainability. In 2023, we advanced our mission of leveraging innovative technologies to make financial service better as well as our ESG strategy centered on technology, green principle and economies. In addition to giving back to society with innovative technologies, FinVolution emphasize integrity and compliance, low carbon development and harmonious relationships with employees, partners and communities in its ESG management efforts.

Moreover, we continue to support small business owners throughout the second quarter's challenges during the second quarter of 2024. We accumulated served around 415,000 small business owners and facilitate RMB 14.2 billion of loans to neutral their gains. I also want to highlight our longstanding cooperation with the national weightlifting team and congratulate them on their recent wins at the Paris Olympics. We are proud to promote awareness of the sports alongside the team and leverage their public image to help small business owners' increase their product sales.

Our tranche initiatives embody our shared increase of the Olympic value of excellence, respect and friendship, helping to create a better society for all. We will continue to integrate ESG management throughout our business operations and partnerships, providing sustainable development across the industry. Before we move on to our CFO review of operational and financial metrics, I'd like to share that FinVolution celebrates its 17th anniversary during the second quarter, a milestone that inspires us to look towards our sustainable future. As such, we set our vision for 2030.

To become an international fintech platform, connecting borrowers in financial institutions across multiple global markets and leading the industry in each of them. We will remain dedicated to leveraging innovative technology to make financial service better and greener sustainably proposing FinVolution's long-term growth. To summarize, despite China's ongoing macro challenges, we successfully deployed our leading technologies and operation capabilities to achieve solid progress in the second quarter across all the markets in which we operate. Going forward, as China's macro environment improved, we are confident of resuming faster growth and delivering consistent returns across multiple metrics for all our stakeholders. With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our operational and financial results in greater detail.

[Jiayuan Xu, executive]

Thank you, Lee, and hello, everyone. Let's go through our key results for the second quarter. To be mindful of the length of our earnings call today, I encourage listeners to refer to our second quarter earnings press release for further details. Despite China's 5% GDP growth in the first half of 2024, uncertainties still persisted in macro environment. To more tricky items and tourism-related activities remained the bright spot with the May holiday, 618 shopping festival and the consumption related to index all showing signs of improvement. However, China's overall retail sales slowed to 2% growth year-over-year in June, which does not reflect an optimal recovery trajectory.

China's manufacturing PMI index remained largely stable in July with manufacturing PMI holding study at 149.4 points. Concurrently, the manufacturing PMI and compensated PMI both reached 50.2 points, which is within the expansion range, indicating Chinese enterprise graduate production recovery. In short, also China's economy is recovering. There are still pockets of tumors, which we will need to navigate using our vast experience and technological and operational process. As Li mentioned, our performance in the first half of the year were solid with transaction volume growth in both China and the international markets lending within our guidance range. This was supported by consistent excellence across numerous areas such as institutional funding, loan collection and retail performance among others.

Let me walk you through some of the details. During the second quarter, our average borrowing rate in China remained stable at IR 22.2%, validating our strong commitment to advancing financial inclusion. Given financial institutions growing designed to obtain good quality borrowers for our platform, our funding costs improved significantly, shrinking another 90 bps during the quarter and recording a cumulative improvement of 114 bps in the first half of 2024, leading to consistent improvement in our take rate. Such a huge annual improvement in funding cost and the score of financial institutions deep trusting our credit risk assessment capabilities and our ongoing enhancement of the quality of our borrowers. Given the quality of our borrowers and ample marketing liquidity, we are confident of achieving continued improvement in funding costs in the second half of the year.

Regarding risk management, the recovery economy and our agile adjustment to our credit risk assessment models drove progressive improvement in our day 1 delinquency rate, which fell by 10 basis points sequentially to reach 5.1% for the quarter. From a vintage perspective, we maintain our view that vintage delinquency will stabilize at around 2.5%. By refining our responsive payment deduction strategy, we have enhanced the efficiency of our loan collection process, resulting in an improvement in our loan collection recovery rate to 88%, up 200 basis points from the previous quarter. We expect this strong recovery momentum of loan collection will persist in the second half of the year. Furthermore, as we continue to optimize our operations, we have strategically adjusted our business portfolio to adapt our partners involving requirements.

For the first half of 2024, transaction volume for our international market reached RMB 4.5 billion, up 32% year-over-year to reach the upper range of our guidance. Supported by the strong global macro environment and our effective legal strategy, we believe our international business growth momentum is sustainable with further diversification among different business models. Moving on to our international expansion efforts. Indonesia, our first and largest overseas market has shown continued growth in its macro economy throughout the first half of this year. With recorded GDP growth of 5.05% for the second quarter and a targeted GDP growth of 5.2% for full year 2024. The Indonesia consumer confidence index has remained high at about 120% for 18 months. The volume of motor bike sales increased 26% year-over-year and 17% sequential to 599,000 as of July 2024 for data treating the nation's heightened customer optimism.

Besides a moderate correction to 49.3% in July 2024, Indonesia manufacturing PMI has remained above 50% since September 2021, reflecting yet 3 consecutive years of sustained economic prosperity. The unemployment rate decreased for the year-over-year in March 2024 to 4.8% from 5.5% in the same period last year, further strengthening consumers' confidence. After 2 quarters of business adjustment towards bad quality borrowers under the new pricing cap, we are proud to share that we have stabilized our operations in Indonesia and continue to gain recognition for our local customers and other stakeholders. This recognition has attracted new funding partners, including a leading local digital bank. We are also steadily building and strengthening our relationships with larger and more reputable local financial institutions to diversify our funding sources, thereby optimizing funding costs.

Next, our second international market, the Philippines. As of July 2024, as manufacturing PMI has remained above 15% for 11 consecutive months. The Philippines labor market is also exhibiting positive momentum with the unemployment rate dropping to 3.1% as of June 2024 from 4.5% compared to the same period last year. Furthermore, private consumption contributed 72.5% of the Philippine's nominal GDP in the second quarter of 2024, reflecting robust domestic demand that will further support the nation's rapid economic growth. Notably, our Philippines operation continued to outperform expectations with transaction volume growing 140% year-over-year and 20% quarter-over-quarter to RMB 674 million in the second quarter, representing 29% of the international transaction volume. This outstanding performance reflects strong support from our local partners such as SeaBank, Union Bank and Meyer Bank.

Our latest funding partners who recently partnered with us on a USD 47 million program. With sufficient funding in place, we believe we can maximize the benefits of our e-commerce cooperation with TikTok shows. Additional new borrowers from diversified channels and sustained continued high growth rate. Now turning to our financial metrics. This quarter's operational expenses lead to better-than-expected financial results. Net revenue for the quarter reached RMB 3.17 billion, up 3% year-over-year. Our net income was RMB 551 million, a 4% increase quarter-over-quarter, underscoring our operational stability. Meanwhile, sales and marketing expenses increased by 5% sequentially to RMB 473 million as we continue to invest in growth across all of our markets.

As we restricted our business mix, our leverage ratio adjusted to 3.5x indicating opportunities for tremendous growth when the economy further recovers. Our balance sheet remained robust with short-term liquidity, maintaining at a security level at RMB 8.1 billion, reflecting our strength and flexibility in executing our legal strategy to advance our international expansion and drive shareholders' return. Consistently rewarding our shareholders to remain a top priority for FinVolution, both through business growth across different markets and our market-leading capital return program, incorporating share repurchase and dividends. Our first share repurchase program began in March 2018, shortly after our IPO in November 2017 and has been widely embraced by our shareholders. Our buyback history indicates 2 repurchase programs with a total deployment of around USD 260 million.

We are now conducting our further repurchase program of up to USD 15 million. Notably, in the second quarter, we deployed around USD 13 million and repurchased 6.1 million ADS. For the first half of 2024, we have deployed around USD 57 million for share repurchase. Our total cumulative share repurchase amount reached to USD 337 million as of the end of the second quarter. In addition, our dividend has steadily increased over the past 4 years with the cumulative dividend amount reaching USD 325 million in total. Our capital return program has returned to USD 662 million to our shareholders with a payout ratio rising to 49% of net profit in 2023. Going forward, we will continue to strengthen our capital return program for our shareholders.

In summary, our solid second quarter results showcase our legal strategies effectiveness. Our nimble business model and our technological advantages. We expect our Indonesia operations to become profitable in 2024 and our Philippines operation to contribute to profits in 2025, boosting our confidence in deploying a more proactive international expansion strategy. As we capitalize on the massive opportunities in the international markets, we look forward to delivering sustainable growth and sharing our success with all our stakeholders. That concludes my prepared remarks. We will now open the call to the questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Yun-Yin Wang of China Renaissance.

[Yun-Yin Wang, analyst]

I have 2 questions here. First question is could you give us some color on the trend of your China borrower loan demand in second quarter and also in July. The second question is the Indonesia, your customer acquisition strategy after the API meet the requirement. Any update on the regulation front of the interest rate requirement in 2025?

[Jimmy Tan, executive]

Let me do the translation. Regarding China demand, during the second quarter, the trend of our borrower demand is largely in line with the weakness in residential credit demand. The daily application rate of repeat borrowers declined by mid-single digits, around 6% on an annual basis and quarterly comparison, reflecting weak consumer confidence. In July and August, we had observed that the application rates of our repeat borrowers has increased by mid-single-digit between 6% to 7% on a daily basis. The demand of our borrowers is concentrated in the area of daily necessity. Therefore, when the economy is weak, it will show more resilience and we expect demand will gradually improve in the second half of the year.

From international macro-environment, it is presenting a much more positive trend. After the Indonesia of election, right, political situation has normalized with an improving economy such as GDP increase. Let us concentrate on our performance in Indonesia. During the second quarter, transaction volume for Indonesia market reached 1.64 billion, up about 6% to 7% annually with outstanding loan balance between $1.0 billion, up about 4%. Revenue for the quarter reached $430 million. Number of borrowers reached 530,000, up 4% sequentially, and number of new borrowers reached 200,000 up 9% sequentially. We have cumulatively cooperated with 7 financial institutions, and all our funding is from local financial institutions now.

Our Indonesia operations has completed its pricing transition in just 5 months. We have made adjustments in borrowers, cohorts, model iteration and credit risk has improved by 28% meaningfully offsetting the impact of interest rate reduction. Therefore, our take rate returned to 10%, reflecting our business entering a more stable space. In the second half of the year and for the third quarter, we expect Indonesia operations will resume growth of over 10% with transaction volume potentially reaching new record high. Indonesia online operations will remain stable with credit risk, customer acquisitions, improving consistently for offline operations. We have completed the acquisitions of a multi-finance license with a controlling stake of 83.7%.

Going forward, we will proactively explore both online and off-line channels. multi-products and vinyl pay leaders instalments for different scenarios such as and electric pipes, et cetera. We will fully leverage our China expertise and leverage them in our Indonesia market to ensure future growth.

[Operator]

Our next question will come from Yada Li of CICC.

[Yada Li, analyst]

I was wondering what's the plan and the growth target for the company's domestic business. I've noticed the company has gained a slightly faster volume growth compared with the peers and looking ahead, how likely the company can maintain such growth? And how does the company balance the volume growth and the profitability.

[Jimmy Tan, executive]

Yada, let me do the translation for Alexis. As you know, China market has some changes this year, and it is very different from the previous years. Currently, the scale of China consumer market has slowed down and entered into a stage of increased competition. After the physical restructuration in the industry during the second half of 2023, many players have experienced varying degree of vote reduction. Under the uncertain macro-environment, we are setting for certainty that is beneficial for us and execute sustainable development in China. We have a few ways to achieve this. First of all, we have certainty for success on acquiring new borrowers through information feeds, leveraging on data and behavior. We continue to optimize the information feed China and improve the algorithms and conduct joint order link to enhance ROI.

We are able to increase the accuracy in determining the lifetime value of our customers and maintain stable customer acquisition strategy. Transaction volume contributed by new borrowers was up 2% and 27% year-over-year. Our percentage of new customers was between 12% to 15%. At the same time, we are able to have better cost control and a healthy LTV level. Apart from information feed cranes, we are also actively diversifying our customer acquisition Chinas and have found multiple new Internet platform partners to work with us. In addition, we are also leveraging on our brand to influence our borrowers. For example, during the Olympics period, our support for the national weight-lifting team has achieved tremendous success along with their wins at the game. Along with promoting a positive image for China Olympics, we have also gained remarkable results of over 100 million views and over 20 million counter video traffic transmission.

Secondly, the management of repeat borrowers is a certainty for us, and we have over 17 years of operating history, and we are very familiar with our borrowers through deeply excavating the diversified multilayers and differentiated requirements. We will then refer them with the most suitable product based on different scenarios such as user profiles and behavior characteristics. All this has led us to increase our users' promotion impact by 36% in the first half, which leads to a higher transaction volume for repeat borrowers. Thirdly, our business operations remain healthy with stable performance, coupled with continuous improvement in funding costs, which leads to progressive improvement on multiple funds such as take rate. All these ensure our high-quality growth which is above the industry and lead the cornerstone forward sustainable growth going forward.

[Operator]

Our next question today will come from Alex Ye of UBS.

[Xiaoxiong Ye, analyst]

My first question is on asset quality, so we have noticed that early indicators have lined improved in the second quarter. Just wondering what are the key drivers behind the recent trend? Should we be worrying about any potential uptake in NPL in the second half like in the third quarter last year? Second question is on the sequential trend on the take rate. What has been the key drivers behind? What's the outlook for the second half? Is there any more improvement, more room for improvement for the funding cost?

[Tiezheng Li, executive]

Regarding our overall asset quality. During the initial stage of the recitation last year, we leveraged from our use of experience and pre-empting predictions of the industry trends. We tightened approval rates for risk bottle higher debt, higher risk and deploy different strategies for medium risk groups overall and quickly adjust the boundary strategies during the early stages of delinquencies. In the first quarter, risk performance stabilized, and we are one of the earliest platform in the industry that are able to contain risk at a lower level. During the second quarter, we further optimized adjusted EBITDA rate on the overall credit line and explore solutions for different types of users while maintaining growth in transaction volume and balancing risk. We have also shared that during the second quarter, our vintage delinquency remained stable at 2.5%, while day 1 delinquency reduced by 10 basis points to 5.1% and loan collection recovery rate improved to 88%. We don't think this situation will happen in the second half as the overall environment is much more stable now.

I would like to share more information with you. Over the past 17 years in our operating history, industry-wide fluctuations in asset qualities have occurred 4x. Such fluctuations on average last around 4 to 5 months with the longest lasting 7 months and the shortest lasting 2 months. The fluctuation for this route is considered to be midterm and the impact of fluctuation is smaller based on past recovery experience. The recovery process normally take place at between the 4th to 5th month step, the fluctuation this time round is not unique and has already shown signs of recovery. We are confident to handle any more of such fluctuations in the future based on our experience.

Regarding take rates. During the second quarter, our average borrowing rate remained stable at 22.2%. Funding costs optimized by 90 bps in the second quarter, while vintage delinquency remained stable at 2.5% and take rate further improved to around 3.1%. For the second half of 2024, we expect average borrowing rates to remain stable and funding cost and vintage delinquencies to have further optimization. Our asset quality is popular in such environment, and we are one of the few platforms that are able to maintain growth. This is the reason why we have more room to negotiate for better funding costs with our funding partners. Funding costs has cumulated improved by 140 basis points in the first half and improved by 90 basis sequentially. Going forward, we still believe it will have room for improvement based on what I have just said earlier.

[Operator]

Okay, as there are no further questions, now I'd like to turn the call back over to the company for closing remarks.

[Jimmy Tan, executive]

Thank you once again for joining us today. If you have any further questions, please feel free to contact FinVolution Group Investor Relations team. Thank you all, and have a nice day.