FinVolution Group

NYSE:FINV

Earnings Call Analysis

FinVolution Q3: Growth Despite Challenges

FinVolution Group executed its 'local focus, global outlook' strategic plan, emphasizing growth in the Pan-Asian region. The company's total transaction volume and outstanding loan balance rose to RMB 51 billion and RMB 686 billion, marking a 13% and 9% year-over-year increase respectively. Despite a challenging economic environment, the company maintained stable risk levels and acquisition of new borrowers, increasing net revenues to RMB 3.2 billion, an 8% year-over-year growth. However, there was a slight decrease in net income by 2.6% sequentially. FinVolution's cash position is strong, with over RMB 8.5 billion, reflecting a 58% year increase and showing a robust commitment to shareholders with USD 511 million returned through share repurchases and dividends.

Strong Growth in Core Business Metrics

The company's total transaction volume increased to RMB 51 billion in the third quarter, marking a growth of 13%, while the outstanding loan balance rose to RMB 686 billion, reflecting a 9% year-over-year increase.

Operational Achievements and Commitment to Small Businesses

Operational enhancements, including the integration of AI-powered chatbots, have led to a steady loan collection recovery rate of approximately 89%. The company's dedication to small business owners resulted in serving around 448,000 of them, with loans facilitated totaling RMB 12.3 billion, a 9% increase from the prior year. Sequentially, this represents a 7% growth. These operational strengths, combined with strategic partnerships with 88 financial institutions and a healthy take rate of about 3.1%, demonstrate the company's robust position in the market.

Expansion in International Markets

The company's international presence, particularly in Indonesia and the Philippines, has surged, serving over 4 million borrowers and attracting a new high of 928,000 unique borrowers in the last quarter alone—reflecting growth of 27% year-over-year and 18% sequentially. This international expansion translated into a significant increase in international transaction volume, which leaped by 99% year-over-year and 21% sequentially to RMB 2.2 billion. The company also reported an outstanding loan balance of RMB 1.3 billion and a revenue contribution of RMB 585 million from overseas markets, up 102% and 67% year-over-year, respectively.

Revenue Growth and Marketing Efforts

The company's net revenues grew to RMB 3.2 billion, demonstrating an 8% increase from the previous year. Marketing efforts, aimed at acquiring higher quality borrowers, led to a 13% sequential rise in marketing expenses totaling RMB 530 million, which allowed for a 7% year-over-year increase in new borrowers in the Chinese market and a 27% growth in new international borrowers.

Improved Risk Management Results

Through strategic risk management, including the deployment of collection models and segmentation of borrowers, the company achieved a reduction in the delinquency rate by 0.5% in absolute terms and improved repayment rates by about 2%. These methodologies have so far sustained the company's day 1 metrics at stable levels in both the China and Indonesia markets, with the end of U.S. interest rate increases poised to further benefit the company's international business.

Regulatory Changes and Market Consolidation

With tightened regulations raising barriers to entry for newcomers in the market, the company is well-positioned to consolidate its market share among high-quality players. The registered capital requirement for new players in Indonesia spiked to RMB 25 billion, up from RMB 1 billion, representing a significant increase in the entry barrier and an opportunity for the company to capitalize on the constraints faced by competitors.

Diversification and Strategic Partnerships

The company is diversifying its customer acquisition channels by engaging in offline — as well as online — activities and expanding its product portfolio to include installment loans and 'buy now, pay later' offerings. These efforts are supported by a strategic partnership with Oppo and address the market demand in Indonesia, where the young population frequently updates mobile phones.

Challenges and Net Income Impact

Despite these positive developments, net income for the third quarter experienced a 2.6% sequential decrease. This underscores the importance for investors to weigh growth prospects against potential challenges, such as market fluctuations or slower macroeconomic recoveries, that may impact profitability.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, ladies and gentlemen. Thank you for participating in the Third Quarter 2023 Earnings Conference Call for FinVolution Group. [Operator Instructions]. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. I'll now turn the call over to your host, Jimmy Tan, Head of Investor Relations for the company. Please go ahead.

[Jimmy Tan, executive]

Hello, everyone, and welcome to our third quarter 2023 earnings conference call. The company results were issued via Newswire Services earlier today and are posted online. You can download the earnings release and file 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 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 Letigations Act [indiscernible] statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company 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 [indiscernible] the 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. Please go ahead, sir.

[Tiezheng Li, executive]

Thanks, Jimmy. 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 session. During the third quarter, we steadily executed our local focus, global outlook strategy. We are strengthening our efforts to build our business throughout the Pan-Asian region. Cumulatively. We are proud to [indiscernible] over USD 29 million borrowers in China in Asia and in Philippines. As we continue to expand our results in this process we have tapped more deeply into our leading results in now successfully the point on the oil out on our regional funding partners can now support our loan facilitation operations across different countries, greatly improving our capability to serve more borrowers in our markets.

We plan to leverage and replicate the success as we expand into additional countries while strengthening our present existing markets. China's post COVID economic recoveries continue to progress gradually during the third quarter, with macro data reflecting an even improvement in different areas. For instance, in September, the consumer confidence index came up slightly to 87 points, but is still hovering at a relatively low level.

Also, according to data from the national statistical bureau employment rate officially peaked at 5.3% in July before trending down to 5% in September, although there has been some moderate recovery in the consumption market. The bulk of the recovery has been in children's education, both medical, health care, domestic travel and other off-line activities. Purchase intention for big ticket items such as property, cars and luxury goods remain relatively weak. Meanwhile, the overall macro environment in Indonesia, our luggage overseas market remained robust as the region is in a faster stage of development.

For instance, Indonesia's consumer confidence index from August to October remained high at about 125 points, a positive indicator for increasing consumer spending. Its unemployment rate in September also declined to 7.3% compared with 5.9% in the same period last year, its lowest level since the first quarter of 2020. Thus far, our tactical approach of maintaining prudent progressive growth in China market. We are pursuing rapid growth in the international market has proven very effective in the current and even micro conditions we have observed. While waiting for China's economy to recover at a faster rate. We have been constantly investing in R&D to further streamline our processes. We have customer experience and achieve operational efficiency improvements. Since 2018, we have deployed around RMB 2.4 billion to develop cutting-edge technologies and implement them throughout our business operations. In particular, we made notable progress with BLU, our AI-powered chatbot, which now supports operations in 6 different countries with 5 language options.

Chinese, English, Takalo, Bahasa and Spanish. Furthermore, by integrating BLU with our human loan collection personnel for [indiscernible] reminder calls, we have achieved cost savings of up to 80%, while maintaining our [indiscernible] cost efficiency levels. BLU's effectiveness was again showcases our R&D progress as well as our ability to improve operational efficiency. [indiscernible] may take yet innovative type that can be seamlessly applied in our operations across different markets. The beginning of AI, we continue to leverage AITC to boost social media engagement for our overseas business, increasing our campaigns, audience targeting accuracy and achieving greater visibility on a leading social media platform.

Thanks to our engaging AITC driven advertisement and the inventive use of technology. Our followers on Facebook surpassed the 1 million milestone. Now our followers on TikTok grew to around 740,000. As always, we continue to promote financial inclusion. A mission that reflects our commitment to social responsibility and support our business goals. Our average borrowing rate in China maintained stable sequentially, making our products and services accessible to even more borrowers.

I'm pleased to report that despite all the macro uncertainties, FinVolution Group's total transaction volume for the third quarter grew to RMB 51 billion. While our outstanding loan balance grew to RMB 686 billion, representing a year-over-year increase of 13% and 9%, respectively. These results clearly demonstrate that our local focus, global outlook strategy and not only variable, but it is also scalable, which is a critical factor for our future growth.

On a related note, I would like to share a brief update on our recent ESG initiatives. Our dedication to sustainability and giving back to society remains at the heart of our corporate values and forms a core part of our identity. Over the last couple of years, the company has made several charitable trips to the [indiscernible] area. This year, we donated 350 renewable energy stream labs to improve infrastructur for the local villages. We also organized a unique school event for children at evolution Kindergarten, another of our long-standing community projects in the area. Going forward, we will continue to align our ESG and business goals to maximize our positive societal impact to creating value for all of our stakeholders.

To summarize, the third quarter of 2023 was not without challenges, but our firm and focused execution of our local focus, global auto strategy alongside take innovation empowered our steady progress and strengthened our foundation supporting long-term sustainable growth. We will continue to embrace inclusion accessibility and technology as we seek to serve orders throughout the Pan-Asian region with better financial services. With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our operational and financial results.

[Jiayuan Xu, executive]

Thank you, Li, and hello, everyone. Welcome to our third quarter 2023 earnings call. In the interest of time, I will not go through all of the financial line items on this call. Please refer to our earnings release for further details. As Li mentioned, the domestic macro recovery has been gradual and reflects uneven improvements in certain areas. For instance, the official manufacturing purchasing managers index PMI from August through October fluctuated between 49.7, 15.2% and 49.5 points according to data released by the National Bureau of Statistics on October 31, 2023.

Meanwhile, total social financing data in October increased to RMB 1.8 trillion, up 9% from the same period last year. Total retail consumption in October increased to RMB 4.3 trillion, up 7.6% compared with the same period last year. Our stable and [indiscernible] quality borrower base empowered us to maintain, stay fast and resilient operational metrics domestically in the third quarter despite the uneven macro environment. Cumulatively, we have served around 25 million borrowers in China with the number of strategic borrowers remaining stable at around 2.3 million.

Additionally, our domestic transaction volume reached RMB 49 billion, up 11% year-over-year and 8% sequentially. Meanwhile, our outstanding loan balance reached RMB 64.6 billion as of September 30, 2023, up 8% year-over-year and 3% sequentially. All these achievements demonstrate our solid standing in the China market and also highlight our unwavering commitment to serving our customers. We continue to import prudent risk management tactics and effective fraud detection technologies, resulting in only minor fluctuations in our risk levels during the quarter.

Day 1 delinquency rate was 5.7%, while [ vintage ] delinquency rate is expected to be around 2.4% to 2.5% for the quarter. Going forward, we will continue to monitor the credit risk performance closely and make timely adjustments when necessary. Finally, boosted by the AI-powered chatbot we mentioned earlier. Our loan collection team capture the loan collection recovery rate at around 89%. Furthermore, we continue to add new funding partners, bringing our cumulative number to 88 financial institutions with a strong pipeline of potential future partners in place. These operational achievements enabled us to maintain a healthy take rate of around 3.1% during the third quarter. Recognizing the critical role that a small business play in our economy. We also upheld our commitment to small business owners with unwavering support during this bumpy recovery period.

During the third quarter, reserved around 448,000 small business owners and facilitated RMB 12.3 billion of loans for them. Representing an increase of 9% compared with the same period last year and 7% sequentially. Now let me move on to our international expansion efforts. As we shared Indonesia, our largest overseas market enjoyed ongoing growth in its macro economy during the third quarter. Sales of motorcycles, the most popular model of transportation in Indonesia has also accelerated.

During the first 9 months of 2023 motor bike sales were up 31% compared with the same period of 2022, reaching around 4.7 million units, a positive indication of growing customer spending. Given these promising trends and the data points, we anticipate the Indonesia domestic consumption will remain robust. We were pleased to record another quarter of significant improvement in our overseas markets across multiple operational and financial metrics. Cumulatively, we have served over 4 million borrowers in Indonesia and the Philippines and continue to rapidly attract new borrowers in these regions. The number of unique borrowers during the quarter reached another new high at 928,000, up 27% year-over-year and 18% sequentially.

Furthermore, we continue to increase the population of institutional funding in Indonesia, and we strengthened our local presence and broaden our local network. For the third quarter, the percentage of loan facilities for our local financial institutions reached 74% compared with 55% for the same period last year. As a result, International transaction volume surged by 99% year-over-year and 21% sequentially to RMB 2.2 billion for the third quarter. We also set new records in outstanding loan balance at RMB 1.3 billion, up 102% year-over-year and 16% sequentially, as well as revenue contribution of RMB 585 million, up 67% year-over-year and representing around 18% of total revenue.

Leveraging our experience of shifting to better quality borrowers in China, we also take a proactive approach to acquiring better quality borrowers in the Indonesian market. Apart from the online lending business, we are also pilot testing and off-line business model with different consumption scenarios to provide more holistic service for our borrowers. In addition, we are also actively exploring the acquisition of additional license to better support our local operations. Driven by word dedication to R&D innovation as well as our successful execution of our local focus global outlook strategy.

Net revenues for the third quarter grew to RMB 3.2 billion, up 8% year-over-year and a secretion increase of 4%. Sales and Marketing expense increased by 13% secretion to RMB 530 million as we increased our efforts to acquire better quality borrowers through diversified channels. Number of new borrowers in the China market increased by 7% year-over-year and 12% sequentially to 406,000. Notably, the number of new borrowers in the international market increased by 27% year-over-year and 36% sequentially to 423,000.

In total, we acquired around 829,000 new borrowers during the third quarter, up 16% year-over-year and 23% sequentially. Net income for the third quarter was RMB 575 million, a sequential decrease of 2.6%. Our leverage ratio, which is defined as risk-bearing loans divided by shareholders' equity remained stable at 4.1x, indicating future growth potential as the overall macroeconomy recovers to a healthier state. Our strong balance sheet and liquidity position continues to enhance shareholders' confidence while providing as optimal flexibility to execute our strategy.

In particular, our cash position remains robust with over RMB 8.5 billion of cash and short-term liquidity as of the end of September 2023, representing an increase of 58% year-over-year and 4% quarter-over-quarter. We believe our current cash position is sufficient to support our business expansion and return value to our shareholders. Before I conclude, let me briefly update you on our share repurchase program.

For the first 9 months of the year, we have deployed around USD 66 million to repurchase our shares in the market. As of September 30, 2023, we have cumulatively returned the USD 511 million to our shareholders in the form of share repurchase and the dividend distribution, reflecting our strong commitment to enhancing shareholder value. in summary. Our solid results for the third quarter are a testament to the effectiveness of our local focus global outlook strategy. As well as our [indiscernible] business model and technological advantages.

We have used our time wisely during China's and even post or recovery and are poised to be at forefront points of the industry when recovery accelerates. Looking ahead, we will remain focused on developing and implementing cutting-edge technology while expanding our healthy customer base, driving growth and creating greater value by making financial service better. With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue.

[Operator]

[Operator Instructions] First question will be from [indiscernible] of UBS.

[Unknown Analyst]

[Foreign Language]

[Interpreted] So I'm asking about the security outlook for both domestic and international markets. So for the China market, we have seen your payment delinquency tick up a bit in Q3. Could you share more color on the drivers and the outlook for the coming 1 to 2 quarters? Also few more question for your Indonesia market. Any color on the core trend and outlook?

[Tiezheng Li, executive]

[Foreign Language]

[Jimmy Tan, executive]

Hello, Alex. This is Jimmy. Let me translate for Alexis. The overall economy in China, such as the PMI total social financing are recovering very slowly. And being affected by these factors, our risk metrics have some fluctuations during the third quarter. For example, during the third quarter, day 1 delinquency was around and day 1 to 30 days loan collection recovery rate was around 80%, 89%, while 90 days [indiscernible] delinquency was around 1.67%.

And we have actually done several things such as increasing the accuracy and update the model of our per-loan models, such as through the accurate positioning of data mining, data analysis and user behavior analyzing, we have increased. We have enhanced the credit limit accuracy, and we have also accessed the user repayment willingness and probability of default rates. For post-loan models, we have deployed different tools such as WeChat, Push IVR and automated loan collection robots to design a combination of the model strategy.

Such combination strategies have proven to be effective with a deduction in delinquency rate of up to 0.5% in absolute amount. And for borrower with probably the [indiscernible] payments due to [indiscernible], we will also remind them in advance. Leveraging on our collection scores, we segment borrowers into different categories such as repayment behavior remaining of loan balances and changes in debt borrowers' debt levels. And using all these strategies, our repayment rate actually increased by around 2%. The slow recovery in economy and slow recovery in consumer confidence is still weak.

And [indiscernible] risk is an important metric for us. And based on all these strategies that we have deployed our day 1 metric in the fourth quarter has also remained at similar level with the third quarter.

[Jiayuan Xu, executive]

[Foreign Language]

[Jimmy Tan, executive]

Hello, Alex, let me do the translation for Alexis. Indonesia overall macro economy is much more robust than the China market in terms of employment rate, consumer competent index, et cetera. And the risk metrics for our Indonesia market has been stable over the last 1 year. In the third quarter, I believe you have also noticed that we have acquired many new borrowers to maintain rapid growth, and this is the reason why we are having more flexibility for our risk metrics.

And we also segment our borrowers into different segments in order to achieve a better and more accurate risk profiling. And also, the U.S. interest rate increase is ending soon and which will be very beneficiary for our international business.

[Unknown Executive]

[Foreign Language] Hello, Alex, let me do the translation for team. As Alexis has mentioned earlier, China economy is recovering slowly and has had some fluctuation in the risk metrics. And in Q3, there's sort of a small mini credit cycle ongoing. And going forward in 2024, we believe the credit risk will be better. And for FinVolution all along our credit, our asset quality has been better than most, which we believe will be very beneficial for us when the economy recover.

[Operator]

Next question will be from Yada Li of CICC.

[Yada Li, analyst]

[Foreign Language] then I'll do the translation. Hello management, this is Yada with CICC. And my first question is regarding the loan demand. During 4Q '23 are we observing kind of recovery of user demand and looking forward to the end of next year? I was wondering how to view the overall growth trend? And what are the circumstances that we may accelerate or slow down the pace of our loan growth.

And the second question is about International business. What will be the volume revenue and the profit contribution from the overseas [indiscernible] this year and next year? And will Indonesia maintain the high growth trend? And how to view the profitability and the prospects of the other branches, such as Philippines and Veitnam? That's all.

[Tiezheng Li, executive]

[Foreign Language].

[Jimmy Tan, executive]

Hello, Yada. Let me you translate for Alexis. Okay, from internal, we think that the demand is fine. As we continue to invest in the acquisition of new borrowers currently working to reactivate the inactive repeat borrowers. We can share a few data. From internal demand, right, the application rate for repeat borrowers has maintained a steady growth of around 3%.

And for new, and from new borrowers the application rate also showed an increase of between 4% to 7%. We think that consumers still recognize our brand and is much more active. Based on the current weakness on the recovery of the macro environment, we need to have a certain judgment. And we need to balance the growth in demand and also our risk metrics, and we believe we need to have more patients in the overall recovery as risk our top priority metrics right now, and we will balance the risk metrics together with the loan demand of the consumers in order to achieve high-quality growth.

[Tiezheng Li, executive]

[Foreign Language]

[Jimmy Tan, executive]

Yes, let me do the translation second question. The macro environment of Indonesia and the Philippines is much more robust when compared to our China markets. And all these positive macro environment factors actually support our rapid development in these countries. You can see that our transaction volume during the third quarter was about RMB 2.21 billion, while our outstanding loan balance was about RMB 1.29 billion. Outstanding balance was up 102% year-over-year and transaction volume was up 99% year-over-year.

And the number of new borrowers also reached a record high of 423,000 in up 27% year-over-year and 36% quarter-over-quarter. Please also note that this is the first time where the number of international new borrowers exceed the number of new borrowers in China. We still think that there is a huge market potential.

In the Indonesia market, there are over 100 P2P players, and we are currently ranked #3 in terms of outstanding loan balance with a market share of around 6%. Let me briefly touch on the Philippines market. We believe Philippines has very strong growth potential and the transaction volume for this year is expected to grow around 3x. And Indonesia, I thought to mention just now that Indonesia household debt ratio is and it's way below those of the developed countries, and there's a lot of potential.

Regarding profitability, we are in the stage of rapid development with healthy LTV. And our main priority now is grow rapidly and increase market share. Increasing the market share of a much more important priority for us now. Profit is being affected by many factors such as our continued investment in customer acquisitions and the time difference created by accounting principles. We believe that as long as we are able to maintain healthy development, profits will be a natural result of our operations.

[Operator]

Next question will be from Cindy Wang of China Renaissance.

[Yun-Yin Wang, analyst]

[Foreign Language] I have two questions. First question is related to Indonesia. So as one of your competitors has been restricted "by now pay later services " in Indonesia. So any opportunity to further gain market shares from here? And do you have any color in terms of like mid to long term for the Indonesia business strategy and the new loan position outlook?

The second question is regarding to marketing expenses. As we see the marketing expenses update sequentially. What's originally behind it? And also, can you break down the domestic and international customer acquisition cost? How do you expect the customer acquisition costs going forward?

[Jiayuan Xu, executive]

[Foreign Language]

[Jimmy Tan, executive]

Hello, indeed, let me translate the question. Okay. Indonesia right has opted huge opportunities to grow from multiple different aspects. As regulation tightened the players will be affected, but we believe the market will consolidate with, to the better quality players. From the company perspective, the, sorry, I was saying that the entry barrier will also increase when regulations tighten.

For example, the registered capital for new players increased to RMB 25 billion from just RMB 1 billion, and we can share what we are currently doing.

Apart from online information feeds, we are also doing offline customer acquisitions, multiproduct, installment loans, electronics, installments and by now pay later, coupled with multiple scenarios such as mobile phone electric, home electronics and furnitures to read the borrowers. Indonesia has had this trend of young population of large young population and they tend to change mobile phones whenever there's a new release. Plus we have also begun our operation with Oppo, a well-known mobile phone manufacturer to provide such services for them.

[Jiayuan Xu, executive]

[Foreign Language]

[Jimmy Tan, executive]

Let me do the translation. For S&M cost, right, about 70% of them are for China, while about 20% to 30% is for the International markets. From the CPS perspective in Q3, the China market optimized about the overall CPS optimized about 6%, while China market optimized about 7%. International CPS maintained stable. Going forward, depending on the macro environment and the company-owned strategy, we believe our sales and marketing costs will remain stable, and we [indiscernible] the company strategies of upgrading the models on customer acquisition and all those, we believe all these will, all these costs will be further optimized.

[Operator]

There are no further questions. We'll conclude our question-and-answer session now and turn the call back over to management for closing remarks. Thank you.

[Jimmy Tan, executive]

Thank you all for joining the call. If you have any other further questions, please reach out to FinVolution Investor Relations team. Thank you all.

[Operator]

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.