Jiayin Group Inc. (JFIN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Jiayin Group Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, we're recording today's call. If you have any objections, you may disconnect at this time. Now I'll turn the call over to Susie Wang, Director of The Blueshirt Group Asia. Ms. Wang, please proceed.

Hello, everyone. Thank you all for joining us on today's conference call to discuss Jiayin Group's financial results for the second quarter of 2020. We released the results earlier today. The press release is available on the company's website as well as from the Newswire services. On the call with me today are Mr. Yan Dinggui, Chief Executive Officer; Mr. Charlie Fan, Chief Financial Officer; and Ms. Xu Yifang, Chief Risk Officer. 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 actual results may be materially different from expectations discussed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi. With that, let me now turn the call over to our CEO, Yan Dinggui. Mr. Yan will speak in Chinese and then our IR Director, Shelley Bai, will translate his comments to English. Go ahead, Mr. Yan.

[Foreign Language]

[Interpreted] Hello, everyone. Thank you for joining our second quarter of 2020 earnings conference call. We are pleased to report a solid quarter with significant business progress in the face of COVID-19 headwinds and ongoing regulatory opportunities. Most excitingly, we have successfully transformed our business by transitioning the source of funding from individual investors to institutional partners. In Q2, loan origination volume facilities by institutional investors reached to 98.6% compared with near investing period of 2019. This was also up from 26.9% in Q1. This is a remarkable accomplishment, especially having achieved it during the COVID-19 pandemic. I would like to thank our team and our partners for making this happen with their dedication and superior execution.

[Foreign Language]

[Interpreted] Since the beginning of April, all new loans were funded by institutions. We successfully transformed ourselves from a P2P company to a financial technology company with multiple strategic institutional partners and great potential for growth. Most notably, we maintained healthy profitability. Considering that our loan origination volume was down over 20% from the prior quarter, it was a great accomplishment to generate a net income of RMB 41.1 million in Q2, which was even up slightly from Q1. This fully demonstrates the effectiveness of our corporate control approach and our improved operating efficiency. We are poised to execute this rapid and smooth transition without disrupting our business operations. We will continue to onboard new institutions and deepen the relationship with existing ones in order to drive loan growth. As the economy recovers and the consumption rebounds, we will further expand and diversify our institutional funding sources and continue to work on driving down our funding costs. We think that we are well positioned to resume attractive top line growth.

[Foreign Language]

[Interpreted] With the success of our business transition, we were able to leverage our technology and operational capabilities to empower some business platforms to better serve their small to medium enterprises customers. To advance this, we have made significant progress across our partnership goals. We believe this partnership will create more application scenarios for our business and further expand our high-quality borrower space. We expect to deliver more detailed progress in the third quarter.

[Foreign Language]

[Interpreted] Besides our successful business transition in Q2, we remained prudent in our operations with increased efforts in risk management and credit assessment. In order to ensure a high-quality borrower base, we focused on serving repeat borrowers which have the better average credit quality. You can see this in our repeat borrowing rates, which was 72% in Q2 versus 50.8% a year ago. The increase in repeat borrowing rates improved our credit risk profile. In addition, we tightened our risk management policies and improved our credit scoring system by utilizing advanced data analytics, behavior analysis and algorithm-driven credit assessments. The economy is recovering and our credit quality is improving. We will encourage you to see many operating metrics that show improvements in Q2.

[Foreign Language]

[Interpreted] On the regulatory front, last week, the Supreme People's Court of the PRC announced the new guidelines to the court-mandated interest rate cap for private lending. The saving will be kept at 4x that of the LPR. This guidance is being integrated and discussed. However, it appears that the new guidelines are only applicable to private lending. Since we successfully completed the transition into institutional funding, we expect the impact to operations to be minor and manageable. Meanwhile, we will also prepare for the possibility that these guidelines may apply to institutional lending as well. As one of the leading fintech platforms in China, our management team can navigate these sort of changes. We are not concerned. Our platform and system is sophisticated and has the capability to offer different range of products to different risk profile borrowers. We continue to work closely with our institutional partners to better serve our borrowers and grow our business while complying with all applicable regulations.

[Foreign Language]

[Interpreted] To conclude, we expect our growth to resume in Q3 with our platform now fully transitioned to institutional funding sources. We are confident that Jiayin is well positioned to emerge from short-term challenges with an optimized business model and strong execution capability.

[Foreign Language]

[Interpreted] With that, I will now turn the call over to our CFO, Charlie. Charlie, please go ahead.

Thank you, Mr. Yan, and Shelley, and thanks, everyone, for joining our call today. As Mr. Yan just mentioned, in Q2, we achieved healthy profitability despite unfavorable market conditions. More excitingly, this is a quarter in which almost all loans were funded by institutional partners, providing very clear evidence that our institutional funding structure is efficient, sustainable and profitable. Our strategy is unchanged. We will generate top line growth by increasing loan origination volume while optimizing operational cost, improving credit quality and maintaining healthy profitability. Now let me briefly go over the financial results for the second quarter. Please note that unless specified otherwise, our financial figures are in RMB. In the interest of time, I will not walk through each item by line on this call. Please refer to our earnings release for more details. I will just highlight some of the key points here. In the second quarter, lower loan volume drove the decline in our top line metrics. As you would expect, given the market condition and our stringent risk policies, net revenue for the second quarter was RMB 245 million, down 61.5% from the same period of 2019. Going forward, we are ready to resume the growth of fundings as funding is now all from institutions. Moving to costs. The cost reduction efforts we initiated this year are bearing fruit. You can see this in our much lower operating expenses this quarter. Total operating expenses were RMB 197 million, down 24.9% sequentially. This brought us a healthier operating margin of 19.6% versus 16.3% from the prior quarter. We will continue to evaluate the ways to optimize our cost structure and further improve our operating efficiency. Origination and servicing expense was RMB 50.9 million, down 60.1% year-over-year, primarily due to lower loan origination volume. Allowance for uncollectible receivables and contract assets was RMB 10.7 million, down significantly from RMB 70.8 million in the same period of 2019. The decrease was primarily due to 2 factors: first, the lower loan origination volume; and the second, our increased efforts in credit assessment and risk management, which optimized our loan performance. General and administrative expense and R&D expense fell to RMB 36.6 million and RMB 34.1 million, respectively. This was mainly due to the decreased share-based compensation expense allocated to G&A and R&D expenses. As well as the decrease in traveling and other business-related expenses. Sales and marketing expense was RMB 64.6 million, down 56.9% year-over-year. This was mainly due to better sales efficiency, a further benefit of satisfying the demand of repeat borrowers. Due to our tight cost control and improved operational efficiency, we were able to sustain healthy profitability. We posted a net income of RMB 41.1 million, up 4.1% sequentially. Turning to the balance sheet. We ended the quarter with RMB 69.9 million in cash and equivalents compared with RMB 66.8 million as of March 31, 2020. In summary, as we see recovery in the Chinese consumer economy, we expect loan origination volume in Q3 to be higher than in Q2. With that, let's open the call for questions. Mr. Yan, Ms. Xu, our Chief Risk Officer, and I will answer questions. Operator, please go ahead.

[Operator Instructions] Your first question comes from the line of Andrew Scutt from ROTH Capital.

My first question is regarding the rate cap. It's 2-parter here. So first, can you just please share the portion of your loan book that's above and below the cap? And then additionally, now that you guys are fully funded by institutions, do you see any other regulatory issues that may need to be resolved?

Okay. This is Yifang Xu. Thanks, Andrew. I'm going to take on your questions. So your first question is about the rate cap. I'd like to answer this in 2 parts. So related to the rate cap, first, I want to point -- I want to make a point is that as we -- as Mr. Yan has pointed out in his early remarks, our general understanding of the decision is it only applies to private lending, not to licensed financial institutions. So as we have successfully made the transition, our business model today is solely operating with institutional funds. So we are closely working and anticipating details related to that implication to the regulated financial institutions. So with our partnership goals, being fully compliant with the legal and compliance requirements of offerings, including product pricing, is critical to our partnership. So we are definitely committed, and we will continue to follow that guidance and to meet our requirements from our institutional funding partners. Now let's go back and look at that 15.4% rate you are referring earlier about how our loan is priced above or below. Here's how we thinking of our capabilities in originations, our pricing -- room for differentiated risk-based pricing. So currently, our loan portfolio is origination volumes, it's running at all-time high since the time we started making the transition into our new business model, which is funded by the institutional partners. So with that volume in mind, now our assessment is based on our risk assessment, about 70% of our new origination today was still marketable. Because we are -- we were to exercise this new rate cap. But of course, with that 70% of new origination was under this new rate cap, the profitability -- the profit margin is going to be center, given today's cost of funds and operation efficiency. So in line with our overall strategic goals to move to better credit across our customer segments, so we anticipate this percentage will have material increase from a continuous focus on improving our credit management capabilities. In addition, and -- on the improvements and enhancement in the cost of funds as well as the operational efficiencies will also help with our economics. So that's to your first question. The second question relate to are we anticipating to further changes from the regulatory requirements. So far, it's hard for us to forecast. But again, we are watching how things are going to evolve. We are waiting and anticipating more details related to how the changes today and whether or not there will be more specifics related to the rate requirements for the licensed institution partners. Thank you.

Great. That was very helpful. And then congrats again on the achievement of institutional funding and very exciting that you guys are now in a position to return to growth. So just a quick question on the loan growth. Just wondering kind of just the cadence of growth you guys are expecting, how quickly do you think you should be able to get back to kind of the growth you guys are seeing before the triple decline policy was put into place. So just any commentary you guys can provide around that would be great.

Okay. Thank you, Andrew. So I'm going to take on this question again, and this is Yifang Xu. So in terms of the growth, so we're going to comment on the 2 parts, one is from our funding source cost, the other is coming from our lending capability. So after we manage through this transition, now our loans are fully 100% funded through the institutional partners. We'll still continue on growing our institution funding source pipeline to enable future growth. So going to the lending capability part, as I stated earlier, that we are confident and happy to share that our origination volume now is at historical high since we started this transition over a year ago. And just give a sense of what is the numbers going to likely to be like. Our July or August volume combined is already slightly exceeding our Q2 number. So the forward look, I would say that it's -- continues to be dynamic process that we have to maintain our economics while keeping a balanced view on how our credit costs, our operation costs, as well our overall volume growth. So what are we trying to achieve is really to try to have a healthy and a balanced, you probably would say mild to -- general to mild growth trend. So yes, it's basically not likely to see a very sharp exponential growth in the volume, as we see in -- what we are seen in this into this whole industry before this triple decline policy started because we are simultaneously focusing on looking at both growth and continue to improve the credit performance. So there -- as we said that this is the -- overall, it's going to be a pretty dynamic process. When it comes to our lending capabilities, we can look into a little more details on our both repeated customers and new origination. There also were several levers to pull other than -- so in addition to what we said early on the improving in the operational efficiency and cost of funds. So on our repeated customer, we are going to -- we are already focused on expanding our product offering, particularly to the better credit profile customers. As well as we said earlier, turning operational efficiencies and continuing strengthening our credit underwriting capabilities. So we are going to see -- we currently already see both volume and risk distribution are moving towards a much favorable direction. So on our new customer acquisitions, so -- in terms of channel-wise, we have focusing on reaching customers with better cost of profile through a range of social media platforms, information feeds and the partnership with some vertical business applications and platforms. We'll continue to optimize expanding on these channels and partnerships and stay focused again, on our new target segment, which is the better credit segment of customers. So this is going to be a continuous, ongoing optimization process. We're going to keep in balance of cost of acquisitions and credit costs as well as growth opportunities. So overall, we feel pretty confident that we will be achieving our expected volume growth as well as we're keeping the whole overall book healthy. Does that answer your question?

Great. I -- yes, that was perfect. I really, really appreciate the detail you provided there. And then just last question for me. Just a quick one. Do you mind commenting on the credit quality of the loan book right now? And you guys seen the improvements that a lot of your peers have reported in this past quarter?

Okay. I will still taking on this question. On the -- so let's go back to this pre-COVID fee period. Unlike some of our peer companies, we have taken a pretty proactive approach to manage the credit risk early on, in early January, by shifting our originations towards our repeated customers and better credit profile customers. This was also comment -- pointed out by Mr. Yan early. And in addition to that, we have maintained a pretty agile collection operations and other operations to quickly adapt to this new operation environment. So therefore, in -- our last earnings call that we have shared, we haven't noted that we didn't see a material deterioration on our credit risk metric, which is slightly different from quite a few of our peer companies. So now today, we are happy to share is that we actually quickly pick up our speed on the new origination, the volume has gone up. So -- but in that credit metrics are still trending in a positive direction. So it's not a significant turnaround that you will likely -- you are seeing from some of our peer companies, but we are still seeing a positive enhancement. Thank you to the diligent and relentless effort and focus we have -- our team had on improving credit risk and management capabilities. Yes. Does that answer your question?

Yes. Great. And congrats on the quarter. That's all for me.

There are no further questions at this time. I would now like to hand the conference back to the presenters for the closing remarks. Please go ahead.

Thank you, operator, and thank you, all, for participating on today's call. And thank you for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.