Yeahka Limited (9923) Earnings Call Transcript & Summary

[Operator Instructions]. And the first question comes from the line of [ Iain Tang ] of CICC.

[Interpreted] I'm [ Toni ] from CICC. I have 2 questions. First, on domestic payments. In the first half, GPV declined as gross margin grew sharply. Could you explain the key drivers behind both movements? And how do you see the role of the domestic payments business going forward? Second, on overseas payments, both revenue and GPV grew rapidly in the first half as Chinese payment peers accelerate their overseas expansion, how do you see the growth potential for this business? And what are the key competitive advantages?

Thank you very much, [ Ian ]. I appreciate the questions. Regarding the local environment, first of all, in the first half of this year, we do see that the average dollar value spend per transaction is of a decreasing trend. That would not be different to some of the comments that you would have heard on the earnings call of some big technology companies also listed in Hong Kong. So we think that, that is a -- what a big macro backdrop that would affect the industry across the board. At the same time, within the company, we also cut down on customers that are of lower profitability because as we have consistently shown in the past period and stated on the earnings call, our step-up focus of driving the business going forward is ROI and delivery of bottom line profit and return because that ultimately matters the most from shareholders, investors and stakeholders' perspective. And from that point of view, we are very focused on ultimate profit line delivery rather than GPV or revenue per se. So what we have done in the first half of this year is that we did have cut down quite significantly some of the lower profit customers. And the reason is that they can release resources and time of our higher business management to focus on the right set of customers that can in turn not just compensate for the profit loss, but actually even more profit on a very sustainable manner going forward. So what we do is that we focus on large chain customers, brand names customers and also customers that require a little bit more differentiated services or more customized solutions. That, by definition, takes more time and resource to focus, but if we work for that is that we earn a higher margin and much more meaningful, higher margin. And that's why we see that the gross profit as well as the gross margin this year for the China business actually increased quite substantially. And that's not just one-off, that's not just for this period of time. In fact, this is the fourth year consecutively that we have been increasing our gross profit from a China payment perspective. This is also the highest margin that you would have seen for the company in the past 6 years. So again, this is a very steadfast, long-term key focus of ours and that will continue going forward. Now you mentioned about the strategic value of the China business given this type of background. I think this is fairly, very important. First of all, it is a very large space, a large set of customers we have refined our products to the extreme to the ultimate value to customers. As Luke mentioned, the TAM, the market of merchant acquiring is largely is very, very big. And China has been leading the way globally with over 90% penetration rate. And therefore, there's a lot of things that we can export from a product, service perspective and very ultimate as you rightly point out, China merchants going overseas. We think this is a very secular and long-term thing. And we haven't really capitalized on that yet because they're still very nascent stage compared to others. So when they go overseas, we indeed help a lot of [indiscernible] merchants overseas as well. For example, [indiscernible], BYD, all these big brand names and stake overseas, we're actually serving them as merchant acquirer overseas as well. So this continues to be a very important business of ours. Now going forward, from a profit driver perspective, obviously, the overseas business is a very natural extension as we go bigger out from China where we are the dominant market leader already. And we see even more opportunities to grow in terms of profit and deliver that to our shareholders in the overseas countries. First of all, our numbers in terms of GP revenue, profit, fee rate margins, they are very different from the structural set of metrics that you see in the Chinese Mainland. And this has been the case period-over-period. We believe that this will continue to stay, and we will continue to deliver that multiple type of growth going forward. Even though it is a relatively short business in terms of the starting age of it, but now it's already contributing 7% of the gross profit within the payments business. And from a net profit perspective, it's already double-digit percentage. So we would not be surprised that over the next few years that would substantially increase and more than half of the company's net profit will be driving from the overseas businesses. This is really the opportunities that we are seeing. While we are delivering all that and why we have a high mark you asked about that we can continue to defend ourselves. First of all, it is a highly regulated business. you have the licenses, the regulatory bodies, bank channels, ecosystem partners, a very huge system that is not easily replicated over the years. And therefore, we are seeing other peers entering into the space. But at the same time, we also collaborate with them. We have the license, we have the background channels, we have the underlying -- this is actually confirming that this is a very interesting space to get into, while at the same time, our infrastructure and our moat has been quite obvious to the others. And secondly, from a product proposition perspective, all the way historically on top of payments, we also have the combination of that versus other value-added services, be it merchant solutions, e-commerce services, AI software and the engine that we can provide to merchants to help them grow their businesses as well. We continue to see this being very differentiated, not just locally but also overseas as well. And we believe that we will continue to be uniquely positioned to expand with this set of product suites. And again, that is very hard to replicate within a short period of time.

Our next question comes from the line of Vicky Wei of Citi.

[Interpreted] Will management share your thoughts on the gross margin trend of domestic payment business and your thoughts on shareholder return program?

Thank you very much, Vicky, for your question. Regarding gross margin, as I've mentioned before, that and profitability continues to be the focus of the company going forward. So it's not surprising to see that we deliver another record, right, for our gross profit within the Chinese Mainland business. So going forward, we expect that to be staying at a relatively high level compared to the past. We continue to increase monetization, increase the commercialization of our business as well. There are a few ways to do it. First of all, we focus on higher profitability customers and cut down on the lower profitability segments, that would help us to continue take up and focus more on customized solutions for the right set of customers that can sustainably deliver this higher gross profit and gross margins going forward. Another two that we have is on as we input more AI elements into the business processes, for example, on fraud detection, transaction control that also help us eliminate more high risk customers and focus on those who can deliver more sustainable profits going forward. So we have a lot of leeway that we haven't really fully leveraged in the past as the technology tools as our processes become more optimized, we believe that this is something to be leveraged for the next few years. In terms of the capital markets return as we focus on the profit and bottom line delivery, we are very confident about sustaining that going forward. And that's why we think that this is probably the right time to start doing that. So this is the first dividend issuance since our listing. In the past, we have also been doing share buyback. So going forward, a combination of that altogether would be a lot of the tools that we can continue to do sustainably going forward. So we intend to increase our profit and also delivered a return to our shareholders on a long-term basis.

And the next question comes from Yuxuan Chen of Huatai Securities.

[Interpreted]. I have 2 questions about the overseas business. First, I noticed that the gross margin of the overseas business declined in the first half. Could management share some color on what drove the decline and how you see the margin outlook going forward? Second, how do you see the competitive landscape in the overseas market? Has the comparative become more intensive recently?

Yuxuan, thank you very much for your questions. First one about the decrease in margins in our overseas business. I think this is a short-term fluctuation it's a very small percentage change within the half year period. It's still a fairly different level, much higher than the one that you see in the Chinese Mainland. So we think that is due to the mix of the portfolio, while then the fact that structurally, there's a difference between the margins between the 2. So we think that both margins, fee rates and the economics of overseas continue to be attractive and here to stay. And secondly, in terms of the questions about our strategies overseas, first of all, we continue to focus on the local payments between merchants and consumers. That is the bigger segment, the bigger pie of the TAM that I just mentioned, and this is still hugely underserved, underpenetrated, and we believe that our products and our business models have a lot to add value as we have demonstrated in the past. The Chinese going out is part of the [ FIM ], but that's not the only fit. The bigger thing is really the local merchants out there. And secondly, in terms of products, from doing offline, we are also launching our online payment businesses, which are already generating revenue today. So that is a very promising area because it's by diminishing a much bigger avenue to go for and web prepayments as well as stable [indiscernible] agented payments, they are all very attractive topics that companies and merchants and even consumers are thinking about. To that end, we actually have already done our work in R&D product development as well as collaboration with some of the largest players in this space globally. So soon enough, we will make some announcement on that, and you will see that in the news. And we think that by focusing on the right areas with high demand areas, whether it's e-commerce, whether it's advertisement or local services, online payments, agentive payments have a lot of value to offer.

The question comes from Johnny Xie of Deutsche Bank.

[Interpreted] No, I will translate my question. This is Johnny Xie from Deutsche Bank. I got 2 questions. First one, we noticed that domestic GPV still contracted in the first half. So I'm wondering if the contraction has bottom out or if we need more time to -- for this transformation? The second question is about the overseas payment. We noticed that the overseas payment take rate declined year-on-year. So we are wondering what's the normalized take rate in the future.

Johnny, this is Arnold speaking. I'm here to answer your questions. So first off, for domestic payment business, our top priority is to focus on the profitability of our overall payment business rather than focusing on the GPV growth, which we've already explained earlier that we strategize to focus more on business segments, customer segments that are more profitable and intentionally drop lower profit merchants. So going forward, I think this trend will continue. We are not going to put GPV growth as our top priority. But rather, we want to focus more on the GP margins and operating margins going forward. So I think in the future, you will see this trend continues in the next few years domestically because on the bigger picture, China's noncash penetration rate is already there. We are already dominating or we're first-tier players in the market. We have all the capabilities and tactics to drive up profitability, there are -- there are certain phases that we can ramp up GTVs, but we just only choose at this time that we want to focus more on profitability, which we've shown to you all that we are announcing a first time dividend payout. So I think -- in short term, our GPV will remain at a -- at this level, if not a little bit upwards. And in the next 3 to 5 years, we want to expand our GP margins. And right now, GP margin is around 20%, and we want to the expandability of that. So second question on the fee rate. I think the international overseas payment business is on early stage. So right now, our focus is to ramp up the GPs and the businesses. So we want to take in as many different kinds of merchants as cost. So there are -- so there are there are different countries and different regions within those different countries and regions, different types of merchant profiles that they require lower or higher rates. But I think right now, the ups and downs of fee rates of our international business is of a less observation Rather, we want to focus on the improvement of our GPV growth and our merchant base growth also on top of that, how we add other values, such as AI agents and other value-added services on top of the existing payment businesses. So in the near term, our overseas business will remain at this high level. We've explained to the market for the past year that our overseas -- the overseas fee rate is 4 to 5x of our domestic period. I think that differentiator will stay the same for the foreseeable future.

Yes. So just to add, we have different products, regions geographies and therefore, as we expand our product and diversity, as we mentioned, do expect that it would not be a stagnant number, but the overseas number overall would still be a very, very high -- meaningfully higher than the one in our original Chinese Mainland business. So we target the 60 bps, but at the same time, we will continue to focus on GPV revenue and the businesses that can provide higher value.

Our next question comes from [ Erica Cho ] of Jefferies.

[Interpreted]. Can management share more about the overseas strategies and given the current market and regulatory environment? What's your management [ as ] payment business? Or how should we think about the operating expenses in the following quarters?

Thanks a lot, Erica. On the first question, in terms of overseas strategy, I think, first of all, we need to beef up our international talents team as we have been doing that. We need to continue to do that in order to cater all the new needs, demands from the merchants as well as the ambitions that we have just mentioned about. So from that end, we hired many talents from the likes of global card networks, global banks to beef up our team. And we also strike larger partnership scheme with these global entities were banks in order to broaden our collaboration on products, channels as well as geographies. So that would continue to be the game that we should play. And secondly, from a product, as we mentioned, about online payments, agented payments being very hot, we would continue to strike new product channels, and deliver revenue and GPV from that perspective. I mentioned about some announcement in the core to come soon. Please stay tuned on that. And last but not least, our value-added services is indeed one of the key differentiators from a product perspective alongside all the online payments, a change payments and the innovation that we are doing on the payment side. And therefore, as payments has gone overseas, to become the leading force of driving the overseas growth of the company. The next curve of growth, so to speak, will be coming from the value-added services that we can combine over there, and that will be a very powerful combination. In terms of the domestic strategies, the environment over there is obviously different. But it doesn't mean that we cannot our profit delivery and our margins as we have demonstrated in the first half of this year. We think that we have a lot of room to continue to provide that going forward by means of optimization of our business processes. It could be the increase of fee rates. It could be the sharing of the scheme profits. It could also be the increase of tools in AI that can maximize our margins as well as focusing on the right customers that can deliver higher margins. And therefore, we have quite a combination of different set of -- a variety of tools that we can leverage. This is dynamic, and we will continue to leverage that given our market leadership. We are seeing that in the payment space in Mainland China, the market leaders, the bigger companies continue to have an edge over the smaller words, and we will continue to leverage on that. Now when it comes to internal cost control, we mentioned about our digital employees being increased in usage within our system. That's really one of the driving force of the decrease in administrative expenses. And on the R&D side, actually, we decreased by even more than 10%. A lot of it is really putting R&D forces into shortening the cycle of product creation and maintenance, AI generation. And all of these stuff are proprietary created by us. And therefore, we will continue to be innovative, not just on the external business model footprint products and all that. But internally, within ourselves, the way we do things, the way we carry ourselves in terms of operations, we still have a lot of new way to go going forward.

Thank you. I am showing no further questions, and that concludes the question-and-answer session. I would now like to turn the conference back to the management for any additional or closing comments.

Thank you, everyone, again, for joining our results today. We are now ending the call. But if you have any further questions, do feel free to contact us directly. Our contact together with other information in relation to our results, can be found also on our website at yeahka.com. Thank you again, and see you again very soon.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.