Acom Co Ltd

TSE:8572

Earnings Call Analysis

Mixed Results with Strong Customer Growth

In the first half of fiscal year ending March 2024, receivables growth was slightly below the 4.1% target at 3.8%, reaching JPY 2,444.1 billion, with new account acquisition and a cheaper yen playing substantial roles. Operating revenue outpaced its target by 3.1% amounting to JPY 144.2 billion, driven by growth in all main business lines and the currency advantage. However, operating profit fell short by 3%, standing at JPY 44.2 billion, due to increased costs in advertising, promotion, and the provisioning for bad debt, which grew in response to the aggressive addition of new customers. Despite this, the acquisition of new clients is viewed as an advance investment, indicating optimism for long-term revenue growth. Moreover, the company announced steady progress towards launching its Embedded Finance business, anticipating operational commencement between next summer and autumn.

Revenue Growth Amidst Increased Receivables

The narrative of the earnings call begins with a solid performance in operating revenue, highlighting a growth of 1.9% reaching THB 7.3 billion attributed to the expansion of receivables. The plot thickens with the operating profit, which impressively leaped by 17.1% to THB 3.6 billion, aided by a reduction in the provision for bad debt which signals relatively sound financial health.

International Expansion and Workforce Development

A subplot of strategic international growth and employee welfare unfolds as the discussion moves to the Philippine subsidiary, ACF, bolstering its sales tactics and improving asset quality in response to heightened inbound demand. The tale continues with the recent inception of their Malaysian operations, setting the stage for accelerated support from ACOM to push towards profitability. The company's narrative underscores a commitment to cultivating a diverse and rewarding workplace, exemplified by initiatives to increase paternity leave uptake among male employees and enhance women's representation in leadership roles, with the goal of creating a fertile ground for sustainable group growth.

Optimistic Revised Guidance and Revenue Targets

As the story progresses, the company reveals a suspenseful twist: the persistence of robust loan demand has led to a revision of their guidance, now aiming for consolidated receivables to reach JPY 2.5 trillion a year ahead of schedule. Consequently, operating revenue targets have been raised to around 7% growth across all segments. However, this optimistic scenario is balanced by cautionary notes, as the inflow of new customers—anticipated to reach 400,000—will likely increase advertising & promotion spending and necessitate greater provision for bad debt.

Dividend Policy and Shareholder Returns

The closing chapter of the earnings call touches upon the cornerstone of investor relations—dividends and shareholder returns. Staying true to a script that favors both financial health and shareholder wealth, the company maintains a dividend policy aiming for a 10% return on equity and a dividend payout ratio of about 35% by the fiscal year ending March 2025. Despite a decrease in profit due to unplanned expenditures, the company reaffirms its dividend commitment which stands as a testament to their confidence in the future, backed by strong receivables growth and customer acquisition.

Earnings Call Transcript 2024-Q2

[Unknown Executive]

I'd like to extend my heartfelt appreciation to all of you for your kind support to and understanding of the company. Please go to Page 3. I will go over item #1 and give you a summary of our financial results for the first half of fiscal year ending March 2024. Later, Mr. Okamoto, Chief PR and IR Officer, will go over item #2 and give you supplementary information on interest repayment, provision for bad debt and financial expenses.

Please go to Page 4. We initially targeted 4.1% consolidated receivables growth or an increase of around JPY 96 billion for the full year, as shown in the center. But as the bar on the right shows, receivables grew 3.8% compared to where they were at the end of last fiscal year or around JPY 90 billion to JPY 2,444.1 billion. As of the end of September, thanks to new account acquisition, additional borrowing among existing borrowers and the cheap yen, with about JPY 6 billion left to reach the full year target.

Looking at receivables by business line. Receivables grew 4.7% to JPY 957.8 billion and the loan and credit card business grew 2.4% to JPY 1,242.1 billion in the guaranteed business and by 7.7% to JPY 236.2 billion in the international business. I'll come back to this with more details later. Please go to Page 5. Operating revenue shown on the left, stood at JPY 144.2 billion, which was 3.1% more than the original target. Two factors are responsible for the better-than-expected revenue, stronger-than-expected revenue growth across all the 3 main businesses and the cheap yen. On the other hand, operating profit shown on the right was JPY 44.2 billion or 3% lower than the target. With the receivables growth and stronger-than-expected new customer acquisition, A&P spending and provision for bad debt increased. I'll come back to this with more details later. Profit attributable to the owners of the parent shown at the bottom right, was JPY 27.2 billion or 7.5% less than the original target.

Please turn to Page 6. Now I would like to go over receivables, revenue and profit in the first half by business line. Firstly, talking of operating environment in the loan and credit card business with COVID-19 recategorized as a Category 5 infectious disease and normalization of social and economic activities held by various measures, moderate economic recovery continues. With the increasing tensions in the international situation and other risks could dampen the economy, the domestic economy seems more vibrant than prepandemic.

With a more vibrant domestic economy, loan demand remains strong in the nonbank industry. It seems those who did not borrow from consumer finance companies before have become customers in our industry, which I will come back to later in the presentation. Turning to the right-hand side of the page, with personal consumption coming back to its pre-pandemic level, we have invested efficiently and gained new accounts while keeping per customer acquisition cost low. On top of that, we have revisited credit screening among existing borrowers by trying aggressively to get their income certificates, which helped to grow receivables more than expected.

Please turn to Page 7. Loan receivables in the first half increased to JPY 845.2 billion, topping the pre-pandemic level of JPY 840.8 billion in March 2020. Combined receivables of loan and credit card operations stood at JPY 957.8 billion, reaching the full year target of JPY 954.6 billion 6 months ahead of schedule. Please go to Page 8. The number of new accounts in the first half was 215,000 compared to 309,000 last fiscal year or 71.7% of the full year target of 300,000. If the current trend continues, it could top 400,000 for the full year.

Please go to Page 9. We don't believe external factors such as a recovery of the domestic economy and personal consumption are only responsible for the growth of the number of new accounts. We believe an increase in first time borrowers in the consumer finance industry also helped new customer acquisitions. The pie chart on the left shows the proportion of female customers among new accounts. It is around 35%, up from 27.5% 10 years ago. The pie chart on the right show the proportion of borrowers in their 20s among new customers. It has increased almost 10 percentage points compared to where it was 10 years ago. We assume those who did not use to have the option of borrowing to get what they want, have gradually changed their way of thinking in the past 10 years and now use consumer finance services.

Please go to Page 10. Advertising and promotion expenses shown on the left, stood at JPY 10.1 billion due to strong growth of new accounts with JPY 16.9 billion projected for the full year. We, however, have been able to gain new customers efficiently with good control over acquisition cost of JPY 47,000 per new account. Provision for bad debt shown on the right, stood at JPY 35.1 billion on a nonconsolidated basis with JPY 61.1 billion projected for the full year. The factors behind this include a stronger-than-expected new account acquisition and additional borrowing among existing customers. With an increase in the proportion of newer borrowers who are more likely to default, due to strong new customer acquisition bad debt expenses have increased to the pre-pandemic level. With stronger-than-expected receivables growth, allowance for doubtful accounts has also increased. Since new borrowers will be a stable source of future revenue, however, we consider A&P spending and provision for bad debt to be advance investments and we'll continue with aggressive measures to drive new customer acquisition.

Please turn to Page 11 for the loan and credit card business. On the back of strong receivables growth, operating revenue shown on the left, increased 5.7% to JPY 76.3 billion, while operating profit shown on the right, dropped 16.8% to JPY 20 billion due to an increase in A&P spending and provision for bad debt. But again, A&P spending and provision for bad debt are advance investments needed for future revenue growth. You can rest assured -- reassure that while profit decreases temporarily, it will grow in the long run.

Please turn to Page 12. We have made good progress in preparing for the launch of Embedded Finance business. In our effort to further expand the loan and credit card business, we founded GeNiE in April 2022 to offer new financial services through partnership with companies with an end user base. While [indiscernible] plan been pushed back due to delay in system development during the last presentation, we now have a new system vendor with whom we have been working on system development using existing software package since June. System development, which should be completed sometime between next spring and summer is moving ahead as scheduled. Once system development is finished, the company is slated to start operation between next summer and autumn. We are confident that embedded finance, which leverages ACOM's credit screening and collection expertise is a valued service. We'll do our best to prepare for the launch of the business.

Please go to Page 13 for the Guarantee business. Regarding guarantee, partnership with nonfinancial businesses shown on the left, we forged partnership with LINE Credit in March. Receivables have been growing steadily as we simulated. We are in the process of negotiating with other nonfinancial businesses for potential partnership. Once we finalize these negotiations, we'll get back to you with a news release. Consolidated guaranteed receivables, shown on the right, topped the pre-pandemic level of March 2020 and beat the first half target, thanks to enhanced collaboration with existing partners through close communication. In the second half, with ACOM and MU Credit Guarantee extending strong support to their partners as guarantee companies, receivables will grow to top the full year target of JPY 1,261.8 billion.

Please turn to Page 14. Operating revenue shown on the left, increased 6.8% to JPY 34.8 billion. Two factors are behind the revenue growth. Steady receivables growth, which I explained earlier on a previous slide and regular review of guarantee fees. Operating profit shown on the right, dropped 12.3% year-on-year to JPY 11.5 billion due to an increase in provision for bad debt, resulting from stronger-than-expected receivables growth and new customer acquisition. But here again, provision for bad debt is advance investment needed for future revenue growth in the Guarantee business as well.

Please go to Page 15 for international financial operations. The Thai economy has continued to post moderate growth, helped by a recovery of inbound demand and personal consumption. The deregulatory measures which local authorities had introduced to help borrowers hit by the pandemic ended at the end of last December. Political instability continues following the inauguration of the Srettha government on August 22. We need to closely monitor regulatory move toward the nonbank industry. Please find receivables on the right. EASY BUY has boosted its effort to gain new customers through out-of-store sales activities. While it had to restore its previous standards associated with the line of credit and the number of other lenders, a customer can borrow from -- due to an end to regulatory measures through its sales effort, the company achieved a full year receivables target of THB 57 billion, 6 months ahead of schedule.

Please go to Page 16 for EASY BUY's revenue and profits. Operating revenue shown on the left, increased 1.9% to THB 7.3 billion, thanks to receivables growth. With a decrease in provision for bad debt, operating profit, on the other hand, grew 17.1% to THB 3.6 billion, as shown on the right. Mr. Okamoto will come back to this with factors behind the drop in provision for bad debt. Please go to Page 17 for international operations in other countries. Turning to the left-hand side of the page, helped by a recovery of inbound demand, the Philippine economy is likely to continue to post solid growth. ACF, our local subsidiary, has revisited its sales structure and reinforced out-of-store sales activities in its effort to improve its asset quality.

Turning to the right-hand side of the page, our local subsidiary in Malaysia started its operation in September. When I attended its opening ceremony, I shared the excitement of sharing -- starting new business with highly motivated local staff. ACOM will aggressively support the business to help it turn profitable quickly. We continue to do research in other Asian countries. And once we decide to enter new markets, we'll get back to you.

Please go to Page 18. It is our staff, who run all of the businesses I have talked about so far. For sustainable growth of our group, we need to respect abilities, ideas and values of our diverse talent and develop the kind of talent who is capable of putting corporate -- our corporate philosophy into practice. At the same time, we need to build a rewarding and worker-friendly environment. We, in fact, have various measures in place to create a rewarding workplace. As shown on the left, the ratio of male employees who took paternity leave increased from a low 17.6% in March 2020 to 54.8% last fiscal year. While different aggregation methods exist, it is indeed very high compared to the national average. We, however, are not happy with 54% and target 100% by the end of next fiscal year. To get there, we have made the first 5 business days of the unpaid leave paid to encourage our staff to take advantage of the program. Children can be a reason to keep working. We encourage our staff to take the leave, spend time with their families and work hard once they come back.

Turning to the right-hand side of the page, the proportion of female staff among those in section chief and higher positions has increased every year. We target 25% by the end of next fiscal year. Since women generally tend to be less good at promoting themselves or less aggressive than men, we have a special program to promote a mindset for career progression. We will do our best to become a company which can help capable staff to fully leverage their abilities regardless of gender.

Please go to Page 19. Now I would like to touch on the revision to our original guidance we announced at the same time we released our financial results and the revised assumption for receivables behind it. At the start of the fiscal year, we assumed strong loan demand driven by this pent-up demand would continue until the end of the second quarter and would start to come down to its pre-pandemic level in the third quarter and beyond. Demand, however, has remained strong, longer than we expected. We have revised our guidance on the assumption that loan demand will stay strong towards the end of the fiscal year. We now target consolidated receivables of JPY 2.5 trillion, which was initially a target for the final year of the current midterm business plan, 1 year ahead of schedule, by the end of this fiscal year. We have also upgraded our full year target for the number of new accounts from the initial 300,000 to 400,000.

Please turn to Page 20. After we upgraded the receivables target, we also revised up the operating revenue targets with around 7% revenue growth across all the segments. With an increasing A&P spending and provision for bad debt, we revised down the operating profit forecast as shown on the right. An additional 100,000 new customers will likely result in more A&P spending, while newer customers who are more likely to default will probably mean more provision for bad debt. We also revised down the target for profit attributable to the owners of the parent to JPY 52.9 billion or down 3.7% year-on-year. But again, if we can gain 400,000 new accounts this fiscal year, it will drive receivables and revenue growth next fiscal year and beyond. The decline in profit will only be temporary.

Please turn to Page 21. Last but not least, I would like to touch on dividends. As shown at the top, our basic capital policy is to maintain and improve financial health and offer good shareholder return. Our basic dividend policy is to improve shareholder returns, supported by higher profitability and appropriate shareholders' equity. As shown on the left, we target around 10% return on equity, equity to asset of around 25%, with guarantee asset included in the total consolidated asset and a dividend payout ratio of about 35%, in fiscal year ending March 2025 in the current midterm business plan.

Turning to the right-hand side of the slide, while revenue increased, thanks to receivables growth, profit decreased due to greater-than-expected A&P spending and provision for bad debt with a return on equity of 9.2%. Equity to assets shown in the center is on track to get to 25%. As for shareholder return, shown at the bottom, we have kept JPY 6 per share for the first half and another JPY 6 for the second half intact, which works out to a dividend payout ratio of 35.5% for the full year. Strong receivables growth and new customer acquisition, despite reduced profit are behind our decision. We will do our utmost to achieve the targets in the midterm business plan while securing stable growth of the 3 core businesses.

I would like to conclude my presentation by asking for your continued support and guidance to our group. Thank you very much.

[Takashi Okamoto, executive]

I'm going to spend the next 10 minutes or so to go over interest repayment, provision for bad debt and financial expenses for supplementary information. Please go to Page 36 for claims for interest repayments. The number of claims for interest payment in the first half decreased by 21.9% to 7,500. We projected the number of claims to come down around 15% for the full year. The current rate of decline is faster than we expected. We assume this trend will continue towards the end of the current fiscal year.

Please turn to Page 37. The total drawdown reserve loss on interest repayment dropped 5.8% to JPY 13.9 billion. We project the total drawdown for the full year to come down by around 10%, with an accelerated rate of decline towards the end of the fiscal year. Since claims of interest repayment are susceptible to changes in external environment, we'll continue to examine the difference between our initial projections for reserve balance and actually balance every quarter to see if we have a reasonable and sufficient level of reserve sitting on our balance sheet.

Please move onto Page 38 for provision for bad debt. Consolidated provision for bad debt shown on the left, increased 25.9% to JPY 46.5 billion due to an increase at ACOM. We predict the current trend to continue in the second half and have revised the full year projection to JPY 95.8 billion. Provision for bad debt at EASY BUY shown on the right, decreased JPY 1.2 billion to JPY 6.7 billion. With the pandemic subsiding, the company refined its calculation model for a launch for doubtful accounts to try to reflect a recent trend and future projections.

Please go to Page 39. Provision for bad debt on a nonconsolidated basis at ACOM, shown on the left, increased by 33.1% to JPY 35.1 billion. While bad debt expenses increased JPY 4.7 billion, a change in allowance for doubtful accounts was an increase of JPY 2.8 billion. And a change in provision for loss on guarantee was an increase of JPY 1.1 billion.

Now I would like to explain what's behind the increase in bad debt expenses and an increase in change in allowance for doubtful accounts. Two factors are responsible for the increase in bad debt expenses. Firstly, receivables grew both in the line and loan and credit card business and the guaranteed business. Secondly, with the new customer acquisition exceeding its pre-pandemic level since June 2022, the proportion of newer borrowers who are likely -- more likely to default increased. Because of this bad debt expenses in the loan and credit card business and the guarantee business increased JPY 2.7 billion and JPY 2 billion year-on-year, respectively.

Next, I will touch on a change in allowance for doubtful accounts. With the growth of receivables and less commitment line left resulting from additional lending, our reserve ratio increased, which in turn resulted in a increase of JPY 4.3 billion in allowance for doubtful accounts, half-on-half. Allowance for doubtful accounts increased JPY 1.5 billion in the first half of last fiscal year, half-on-half, mainly due to receivables growth, resulting in a JPY 2.8 billion increase in change in allowance for doubtful accounts year-on-year.

Next, I will go over the revised projection. With the growth of receivables and strong new customer acquisition, we anticipate bad debt expenses and allowance for doubtful accounts to increase. We have revised up the full year projection for bad debt from the initial JPY 61.1 billion to JPY 70.4 billion. Two factors are responsible for the increase in bad debt expenses. Firstly, with strong new customer acquisition and additional borrowing among existing customers, we have revised up the full year target of receivables. Secondly, with greater-than-expected new customer acquisition in the first half, the proportion of newer borrowers who are more likely to default increased.

There are also 2 reasons for the increasing allowance for doubtful accounts. Firstly, we have upgraded the receivables target. Secondly, with the new customer acquisition exceeding its pre-pandemic level and additional borrowing among existing customers recovering to its pre-pandemic level, we anticipate our reserve ratio will go up.

Please turn to Page 40. Lastly, I would like to touch on financial expenses. Consolidated financial expenses shown on the left, increased by 8.9% to JPY 2.2 billion due to increase in financial expenses at EASY BUY. Two factors are behind the increase in EASY BUY's financial expenses. With the rising market rates, valuation gains on derivative investments decreased year-on-year and funding costs increased due to rising rates despite a drop in an outstanding debt balance. Nonconsolidated financial expenses at ACOM shown on the right, increased 3.2% to JPY 1.4 billion. Despite concern about rising rates, we have kept our full year projection intact since we should be able to take a rise in funding costs by issuing commercial paper and borrowing at floating rates when needed, while maintaining long-term fixed rate debt.

Please turn to Page 41. Outstanding debt shown on the left, increased by JPY 31 billion to JPY 547.7 billion, with an average borrowing cost coming down by 1 basis point to 0.53%, as is illustrated by the line graph. Since we plan to issue a corporate bond a few times in the third quarter and beyond, we revised down the projection for funding costs from the initial 0.6% to 0.58% for the full year. The pie chart on the right shows funding sources and their proportions. The split between direct and indirect funding is 28.3% and 71.7%, with the funding from MU Bank representing 38.7%.

While there is concern about rising interest rates, given that 88.6% of our total debt is at fixed rates and that 88.9% is long term, the magnitude of the impact from rate hikes will be immaterial this fiscal year. For your reference, Page 42 and following pages show the trend of the size of the personal card loan market, the trend of interest repayment and the impact from COVID-19 and the midterm management plan. This will do for supplementary information on financial results for the first half of fiscal year ending March 2024.

I would like to conclude my presentation by asking for your continued support and guidance to our group. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]