FinVolution Group (FINV) Earnings Call Transcript & Summary

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.

Thank you, Alissa. 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.

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 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 LE-GO strategy. We made great strides 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 stellar performance stands out as a testament to the effective execution of our LE-GO strategy and the unwavering commitment of our team. Customer acquisition is a key element of our LE-GO strategy. We view it as an ongoing investment that will ultimately lead to a higher percentage of better-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 grow 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 engraved in our DNA. It remains at the core of our business and our primary competitive edge. During the second quarter, we hosted an internal tech competition called [ Hackathon ] bringing together 60 R&D teams for a 36-hour session in a closed-door environment. Winning project included admin AI bots, which can incorporate API function calls 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 [indiscernible] 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 cumulatively served around 415,000 small business owners and facilitated RMB 14.2 billion of loans to nurture their dreams. 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 joint initiatives embody our shared embrace 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's 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.

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 persist in macro environment. Small-ticket 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 steady at 49.4 points. Concurrently, the manufacturing PMI and compensated PMI both reached 50.2 points, which is within the expansion range, indicating Chinese enterprises' gradual production recovery. In short, also China's economy is recovering. There are still pockets of turbulence, which we will need to navigate using our vast experience in the 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 landing 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 IRR 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 semiannual improvement in funding cost underscores financial institutions' deep trust in 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 recovering economy and our agile adjustments 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 processes, 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 into the second half of the year. Furthermore, as we continue to optimize our operations, we have strategically adjusted our business portfolio to adapt to our partners' evolving requirements. For the first half of 2024, transaction volume for our international markets reached RMB 4.5 billion, up 32% year-over-year to reach the upper range of our guidance. Supported by a strong global macro environment and our effective LE-GO strategy, we believe our international business's 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 targeted GDP growth of 5.2% for full year 2024. The Indonesian Consumer Confidence Index has remained high at above 120% for 18 months. The volume of motorbike sales increased 26% year-over-year and 17% sequentially to 599,000 as of July 2024, further illustrating the nation's heightened consumer optimism. Beside a moderate correction to 49.3% in July 2024, Indonesia's Manufacturing PMI has remained above 50% since September 2021, reflecting nearly 3 consecutive years of sustained economic prosperity. The unemployment rate decreased further year-over-year in March 2024, to 4.8% from 5.5% in the same period last year, further strengthening consumer confidence. After two quarters of business adjustment towards better-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 from 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, its Manufacturing PMI has remained above 50% for 11 consecutive months. The Philippine 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 Philippines' 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 international transaction volume. This outstanding performance reflects strong support from our local partners such as Seabank, Union Bank and Maya Bank, our latest funding partner, 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 Shop, acquire additional new borrowers from diversified channels and sustain continued high growth rate. Now, turning to our financial metrics. This quarter's operational excellence led 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 continued to invest in growth across all of our markets. As we restructured our business mix, our leverage ratio adjusted to 3.5x (sic) [ 3.4x ] indicating opportunities for tremendous growth when the economy further recovers. Our balance sheet remained robust with short-term liquidity maintaining its healthy level at RMB 8.1 billion, reflecting our strength and flexibility in executing our LE-GO strategy to advance our international expansion and drive shareholder returns. Consistently rewarding our shareholders remains a top priority for FinVolution, both through business growth across different markets and our market-leading capital return program incorporating share repurchases 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 includes two repurchase programs with total deployment of around USD 260 million. We are now conducting our third repurchase program of up to USD 150 million. Notably, in the second quarter, we deployed around USD 30 million and repurchased 6.1 million ADS. For the first half of 2024, we have deployed around USD 57 million for share repurchases. Our total cumulative share repurchase amount reached to USD 337 million as of the end of the second quarter. In addition, our dividends have steadily increased over the past 4 years with the cumulative dividend amount reaching USD 325 million. In total, our capital return program has returned USD 662 million to our shareholders, with the 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 LE-GO strategy's effectiveness, our nimble business model and our technological advantages. We expect our Indonesia operations to become profitable in 2024 and our Philippines operations to contribute 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 your questions. Operator, please continue.

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.

[Foreign Language] I have two questions here. First question is could you give us some color on the trend of your China borrowers' 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?

[Foreign Language]

[Interpreted] Hello, Cindy, let me do the translation. Regarding China demand, during the second quarter, the trend of our borrowers' demand is largely in line with the weakness in residential credit demand. The daily application rate of repeat borrowers in the second quarter declined by mid-single-digit around 6% on an annual basis and quarterly comparison, reflecting weak consumer confidence. In July and August, we have observed that the application rate 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.

[Foreign Language]

[Interpreted] From the Indonesian macro environment, it is presenting a much more positive trend. After the Indonesian election, the political situations have normalized with an improving economy such as GDP increase. And let us concentrate on our performance in Indonesia. During the second quarter, transaction volume for Indonesian market reached RMB 1.64 billion, up about 6% to 7% annually, with outstanding loan balance over RMB 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 seven financial institutions, and all our funding is from local financial institutions now. Our Indonesian operations has completed its pricing transition in just 5 months, and we have made adjustments in borrowers' cohort, 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 stage. In the second half of the year and for the third quarter, we expect Indonesian operations will resume growth of over 10% with transaction volume potentially reaching new record high. Indonesian online operations will remain stable, with credit risk, customer acquisitions improving consistently. For offline operations, we have completed the acquisition of a multi-finance license, with a controlling stake of 83.7%. Going forward, we will proactively explore both online and offline channels, multi-products and buy now, pay later installments for different scenarios such as electronics and electric bikes, etc. We will fully leverage our China expertise and leverage them in our Indonesia market to ensure future growth. Hello, Cindy. Any more questions from you?

No more questions from me, thank you.

Our next question will come from Yada Li of CICC.

I will do the translation. I was wondering, what's the plan and growth target for the company's domestic business? And I've noticed that 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 profitability?

[Foreign Language]

[Interpreted] Hello, 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. And currently, the scale of China consumer market has slowed down and entered into a stage of increased competition. After the [indiscernible] risk fluctuation in the industry during the second half of 2023, many players have experienced varying degree of earnings reduction. Under the uncertain macro environment, we are searching 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 feeds in China and improve the algorithms, and conduct joint modeling to enhance ROI. And 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 feeds in China, we are also actively diversifying our customer acquisition in China, 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 weightlifting teams has achieved tremendous success along with their wins at the games. Along with promoting a positive image for China in Olympics, we have also gained remarkable results of over 100 million views and over 20 million counts of video traffic transmission. And 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 their diversified multi-layers and differentiated requirements, we will then refer them with the most suitable products based on different scenarios, such as user profiles and behavior characteristics. And all these have 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 fronts such as take rates. All these ensure our high-quality growth, which is above the industry, and lay the cornerstone for our sustainable growth going forward.

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

[Foreign Language] So my first question is on asset quality. So we have noted that early indicators have greatly improved in the second quarter. Just wondering what are the key drivers behind recent trend? And should we be worrying about any potential uptick in NPR in the second half, like in the third quarter last year? And the second question is on the sequential trend on the take rate. What have been the key drivers behind? What is the outlook for the second half? And is there any more room for improvement for the funding cost?

[Foreign Language]

[Interpreted] Hello, Alex. Let me do the translation. Regarding our overall asset quality, during the initial stage of risk fluctuation last year, we leveraged on our years of experience, and preemptively accurate predictions of the industry trends, tightened approval rates for riskier borrowers with higher debt, higher risk, and deployed different strategies for medium risk group burrowers, and quickly adjusted [ boundary ] strategies during the early stages of delinquencies. And in the first quarter, risk performance stabilized. And we are one of the earliest platforms in the industry that are able to maintain risk at a lower level. During the second quarter we further optimized, adjusted and iterated on the overall credit limit, and explored 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 rates 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 with you -- would like to share more information with you. Over the past 17 years in our operating history, industry-wide fluctuations in asset quality have occurred four times in our record. And 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 round is considered to be mid-term, and the impact of fluctuation is smaller. Based on past recovery experience, the recovery process normally takes place between 4 to 6 months. Therefore, the fluctuation this time round is not unique, and has already shown signs of recovery. And we are confident to handle any more of such fluctuations in the future, based on our expertise.

[Foreign Language]

[Interpreted] Regarding take rate, during the second quarter, our average borrowing rates remained stable at 22.2%. Funding cost optimized by 90 bps in the second quarter, while vintage delinquency remained stable at 2.5%, and take rate further improved to 3.1%. For the second half of 2024, we expect average borrowing rate 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 have cumulatively improve by 140 basis points in the first half, and improved by 90 basis points sequentially. And going forward, we still believe it will have room for further improvement based on what I've just stated earlier.

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

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.

This concludes this conference call. Thank you for joining. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]