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 of 2021 Earnings Conference Call. [Operator Instructions] As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. I will now turn the call over to Ms. 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 2021. We released the results earlier today. The press release is available on the company's website as well as from newswire services. On the call with me today are Mr. Yan Dinggui, Chief Executive Officer; Mr. Xu Yifang, Chief Risk Officer; and Ms. Shelley Bai and Ms. Delia Chen, Co-Chief Financial Officers. 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 expressed 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 statement, 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 Co-CFO, Ms. Shelley Bai, will translate his comments to English. Go ahead, Mr. Yan.

[Foreign Language]

[Interpreted] Hello, everyone. Thank you for joining our second quarter 2021 earnings conference call.

[Foreign Language]

[Interpreted] We delivered an outstanding quarter, achieving record-breaking operational and financial results as loan origination volume progressively increased by 153% year-over-year with 100.9% growth in revenues. These results are strong testimonies to the success accomplished in implementing our key strategy, driving organic growth in China while deepening partnerships with financial institutions through leveraging our sophisticated risk management systems and providing individual customized solutions.

[Foreign Language]

[Interpreted] Notably, with the strong top line growth and outstanding execution in cost control policy, strong momentum in profitable growth continues. Net income grew a significant 208.5% year-over-year, reaching RMB 126.8 million. This is a remarkable improvement and illustrates our ability to improve profitability through strong growth and outstanding execution.

[Foreign Language]

[Interpreted] As shared with you in the last few quarters' earnings calls, we are focusing building integrated, highly automated platforms with great risk management intelligence to be an irreplaceable effective partners to our institutional funding partners. Our funding partners increased to 52 in Q2. And we are in discussion with another 45 institutions with aims to further broaden partnerships for diversifying our funding resources while maintaining risk management excellency.

[Foreign Language]

[Interpreted] Our ability to provide assets with qualified risk profile that needs risk requirements for respective funding partners make a solid foundation for higher loan originations. In this quarter, we resumed the marketing and began attracting new borrowers in a more accelerated pace with focus maintained for higher-quality borrowers. A large portion of our loan volume continue to go to our existing borrowers with higher quality. With our repeat borrowing rate for this quarter at 72.4%, we believe serving higher-quality borrowers will improve our credit risk profile and insurance asset quality. We are very pleased with the progress as excellent financial results illustrate the strength in the consumer market and the growth trajectory of our business. We remain dedicated to controlling credit quality with our improved credit scoring system and advanced technology capabilities.

[Foreign Language]

[Interpreted] In terms of the overseas market, we are taking a more prudent approach with uncertainties brought by the surge of the Delta variant and the margin dilution by heightened competition. Nigeria, Indonesia and Mexico are our key overseas markets that present promising business potentials, with our progress in these markets gradual and steady. We are striving for a good balance between the investments and risks. We expect to have a better picture later this year depending on geopolitical changes, virus control and improvements and global monetary policy changes. Agility and prudency are both critical factors in our business strategy, which will enable us to emerge stronger and achieve more success in the evolving market environment.

[Foreign Language]

[Interpreted] We completed the integration with Bweenet this quarter. As you might be aware, the recent crackdown on bitcoin mining in China has affected the market sentiment and brought temporary challenges to immediate mining prospects. However, Bweenet is primarily focused on blockchain-related technologies and hardware solutions for decentralized applications. We provide our clients one-stop solutions related to cloud storage, cloud computing, network bandwidth, content delivery networks and others. As blockchain-based applications are developing rapidly, we are confident we can benefit from this growing market with our first-mover advantages and technology capabilities.

[Foreign Language]

[Interpreted] In conclusion, we are excited over the resumed high growth in our domestic market with our record-breaking operational and financial performance this quarter. We will continue to roll out initiatives and our planned technology across our business to improve operational efficiency and create long-term, sustainable value for shareholders.

[Foreign Language]

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

Thank you, Mr. Yan and Shelley. And thank you, everyone, for joining our call today. As Mr. Yan mentioned, we achieved a milestone quarter, and we grew origination volume by 153% to RMB 5,663 million with 100.9% growth in revenue and 208.5% in net income. This outstanding result came in well above the upper end of our guidance range on a year-over-year basis, demonstrating the success of our business transformation as well as our speed and strong execution in enhancing our risk management and the improving asset quality. Now let me go through our financial highlights for the quarter. Please note that unless stated otherwise, all numbers quoted are in RMB, and the percentage change refer to year-over-year comparisons. Net revenue was RMB 492.2 million, up 100.9%. Revenue growth was primarily driven by the significant growth in loan origination volume, which increased 153%. Other revenue was RMB 38.5 million, down 8.3%. This decrease was primarily due to reduced revenue from P2P-related services as the company no longer supports the legacy P2P lending business, partially offset by increased revenues generated from our overseas business and Bweenet since the integration in May. Moving on to costs. We also had a substantial improvement in operating efficiency, reflecting actions we took over the last 2 years to streamline our expense base. In the second quarter, total operating costs and expenses were RMB 342.6 million, up 73.9% from RMB 197 million last year. The increase was along with our top line growth. However, total operating costs and expenses as a percentage of revenue was [ 59.6% ] versus 80.4% in the same period last year, demonstrating our ability to contain expenses growth, which will enable our infrastructure to scale as we grew. Origination and servicing expenses were RMB 83.2 million, up 63.5% primarily due to the increase in credit assessment expense resulting from higher loan origination volume. In this quarter, we incurred cost of sales of RMB 5 million, which is equivalent to USD 0.8 million, compared with 0 from the same period of 2020. The increase was primarily due to the cost of hardware sold by Bweenet. Allowance for uncollectible receivables, contract assets, loan receivables and others were RMB 13 million, up 21.5% from the same period of 2020. The increase was primarily due to an increase in loan principal and increase as a result of the higher loan origination volume from overseas business partially offset by the decrease in the estimated default rate under current business model since we no longer support the legacy P2P lending business. G&A expense was RMB 35.2 million, down 3.8% primarily due to the decrease in headcount, of which has been partially offset by the increase in personnel-related costs allocated to general and administration departments. R&D expense was RMB 31.9 million, down 6.5%. This was primarily due to the improved utilization of our facility allocating to research and development department, of which have been partially offset by the increase in professional service expenses as the company continues to enhance the research and development capabilities. Sales and marketing expense were RMB 174.2 million, up 169.7% primarily due to our new online advertisement and marketing strategy, which has resulted in higher customer acquisition expenses. As we intend to continuously grow origination volumes, we began attracting new customers at a more accelerated pace with our superior marketing algorithms and translating them into our loyal customer base. We achieved a noteworthy profitability through our loan volume growth and improved operating efficiency with a positive net income of RMB 126.8 million, up 28.5% year-over-year. We ended this quarter with RMB 141.4 million cash and cash equivalents compared with RMB 123.3 million as of March 31, 2021. Moving to our guidance. We expect our loan origination volume of RMB 27 billion to RMB 30 billion for the full year 2021, representing 133% to 159% year-over-year growth. With that, we can open the call for questions. Mr. Yan; our Chief Risk Officer, Mr. Xi; and I will answer questions. Operator, please go ahead.

[Operator Instructions] The first question comes from the line of Craig Irwin from ROTH Capital Partners.

The most exciting number that you shared, I think, was the origination volume with more than RMB 5.6 billion in the quarter. Can you talk a little bit about the contribution of customers -- new customers added in the past couple of months and how quickly your funding partners contribute to these very high growth rates? Do we see a larger portion added on the front end as new partners are added? Or do the new partners tend to accelerate over time?

This is Yifang. Thanks, Craig, for your questions. I will take a stab on addressing your question. So yes, as you have seen in this Q2 was seeing significant amount of volume increase over time. As we have disclosed in our notes early, the number of the funding partners we're working with have increased to 32. We are a lot more diverse in terms of the type of FIs we are working with as well as the numbers are increasing as well. And we are seeing on both factors have impacting coming from bringing on new funding partners and deepening relationships with our existing previous partners we have, which we have brought on board last year also. So that we are managing our FI partnerships in a -- within a mixed several factors in consideration, that we have to take into consideration of the regulatory changes over time. So diversification is one of the crucial component for us to managing that towards to be able to achieve a stable supply of the firm funds. Now we have added different aspects in terms of the geographical compatibility of our growth profile because we are seeing some local, regional requirements in terms of the type of customers some of FIs are acquiring and specifying. And the last thing that is also important is to continue to improve our overall economics and to achieve higher, low competitive cost of funds. We have to manage to have a wide range of -- and also a good number of partners that we are working with to set ourselves in terms of our business terms. Hope that answer your questions.

Yes, it does. So my next question, it's obviously directly related. Your increased marketing spend to drive this accelerating origination volume, the margin spend was up materially quarter-over-quarter. And it's amazing that you had such very quick results. I'm going to guess that [indiscernible] liquidity had more play between the marketing spend and the new loan origination with the customers captured. Can you please describe that process and maybe share some of the details of where you're spending these increased marketing money? And if you could also discuss how you're budgeting the total marketing spend? Are you targeting 30% operating margins? Or are you targeting a particular expense level as you continue to scale the business?

Yes. This is Yifang again. I'm going to speaking to the first part of your question, and then maybe Delia can chime on, on the last question. So that yes, we are seeing that higher increase on our marketing expense, which is even on the per unit basis, we are maybe looking at higher sales and marketing per customers acquired. A couple of reasons for me to why we are seeing a higher risk -- higher cost on that item. One is we are continuing to really focusing on the better quality customers. And in the market that we are working on right now, the current market landscape, the cost of acquiring such customers is significantly higher than compared to what we are seeing in probably 2019 or early 2020. The channel also has had significant change compared to the early years as well. So we -- today, we no longer see the channel mark type of market practice. We are going to -- we are actually acquiring our customers through the direct channel a lot more, working with the major Internet companies to acquire to the -- what we call the information streaming to secure -- to acquire customers directly. We are seeing almost, I would say, almost 100% growth in those new channels. And the cost of -- in the new channels are higher, but the qualities are significantly better in terms of both approval rates as well as the -- from the early risk readings we are seeing. So that's the primarily what we are seeing in the channel mix is shifting to a higher cost channel and the -- our focus on better quality customers are also driving the per unit costs up. And I think from the client perspective, we are still thinking that -- we are still considering this is a healthy, organic growth considering that we are pre-planning for the future, especially considering the continuous interest -- the trend on the interest rate was -- we are -- the type of requirements that we are seeing from our financial institution partners in terms of the loan interest rates we are -- we have to work with. And we are putting a stringent view on our risk spectrum to making sure that we are not compromising or being more tied on the gross marketing per unit cost but in exchange for a higher future risk, uncertainties. So we actually -- we are balancing that, trying to stay -- to keep our growth for a future more healthy growth to target better risk quality customers and in trading some cost increase at this point in current cost -- on a current cost point of view. So I think I talked a little bit about higher growth in terms of the high-cost segment -- channel segment. At the same time, we have seen that sales and marketing cost per unit costs are coming down -- driving down in Q3. We have pretty good line of sight of having probably 20% to 30% of efficiency improvement in the pipeline right now. And as we are seeing the continuous growth on such high-quality customer channels, and we are -- our ability to manage that per unit cost down, we have seen some -- we are definitely in a good position in terms of the economics point of view. In terms of total budget, I'd like to ask Delia to comment on that.

Yes. Yes, so this is Delia. Thanks, Craig, for the question. I think compared -- yes, this quarter, sales and marketing expenses versus last quarter, we've seen like over 90% of the increase. I think it's -- to add more color on this, I think it's mainly due to 2 reasons. The first is that the fee settlement way is different from previous because in the traditional or in the previous way, this -- compared with the traditional way, this quarter, we started to launch the information feed advertisement. And for this new kind of development marketing strategy, the fee booking ways is totally different versus the previous ways. In previous ways, we recorded fees based on the performance, that is a CPD, cost per download, or CPS, cost per sales. Before this information feed advertisement, we record the marketing expense upfront. That means we recorded in the CPC or CPM way, which is short for click -- for cost per click or cost per milles way. So you will see that the initial stage that we launched this kind of marketing strategy, there will be a bump where you would see an increase -- significant increase in the sales and the marketing increase. That is probably the major reason that you see that our sales and marketing expense outpaced the loan origination volume growth pace. And then second, I think that is basically like a new strategy, new marketing strategy, launching logic is that we started to partner with our channel providers. And we review the models with them, and we do some dry runs to try some marketing strategies. And we get numbers from the channel partners, and we go back to optimize our algorithm and improve our marketing strategy, launching strategy. So at the initial stage, I will say it -- the cost per -- like cost per newly acquired customers will be inevitably higher than usual. So at the initial stage, I would say especially this quarter, the first quarter that we launched this new marketing strategy is inevitably to see a significant rise in sales and marketing expense. But in the future, I would say we expect to see some room for the improvement in the cost effectiveness. I think in the future, as we -- there are so many like optimization of the marketing strategy right now are going on. I'm not the expertise in this, but I'm pretty sure our technology team spends a lot of great effort on this to improve the cost per newly acquired customer, the data on this. So I would expect that in the next quarter or in a couple of a few months, the cost effectiveness will be improved and the cost per like newly acquired customer will be drive down. And for the -- I think because there are a lot of moving parts, at this quarter -- at this initial stage of launching this marketing strategy, we will not say that -- we will not set a specific number or like absolute number for the marketing and the sales expenses or to set ratios of these expenses, the ratio of the total loan origination volumes. But we are confident that in the future, in the short term, we may be -- it's not like that unlikely that these marketing and sales expenses would outpace our loan origination volume growth a lot. That will be all.

So can you share a little bit more detail around your international expansion and update on Indonesia and Mexico and whether or not you're contemplating other markets internationally at this time?

Certainly. I will take on this question, too. So as we said that we remain optimistic and consider that international strategy is one of our key components of our strategy. But we are taking a prudent approach in terms of how we're considering the overall component of the international market expansion effort. So there are different set of risk factors and uncertainties when we are managing the international market. As we have mentioned earlier, the surge of the Delta variant is having bigger impact in the emerging markets, which are slightly different from what we are seeing in the Mainland China market. And the economic growth and the political or regulatory stability is also somewhat more fluctuate compared to our Mainland China market. So we are kind of managing those risk factors compared to the growth needs and the economic needs from business stand point of view. But we're still happy to report in Mexico, we maintain to be the top-tier player in the market in spite of we are seeing a influx and out flux of new players coming into the market occasionally. In certain months, we have seen them driving the marketing costs up, which has some sort of impact -- have somewhat impact on our economics, but we are still maintain to be the top player in the market now. And then Nigeria, we have gone through the setting-up phase of that market. We have obtained our money lending license. So the next stop is really for us to start to grow -- drive the growth in the market. In the Indonesian market, we are seeing from recent regulatory changes related to how they're managing the license application process. We are seeing some -- and such change does have somewhat impact on us. We also continue trying to sort that out, just continue to go in. But we are still dedicated to the Indonesia market. As well as our newer markets, and there are a couple of new markets. We are in investigation and in the early feasibility study phase. But I have to say that most recent political change, that may have some impact on our speed and our appetite in taking on new markets at this point.

[Operator Instructions]

Okay. 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.

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