Yiren Digital Ltd. (YRD) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Deposit Receipts Virtual Investor Conference, dbVIC. My name is Zafar Aziz from the Deutsche Bank team. I'm pleased to announce that our next presentation will be from Yiren Digital Limited from China. [Operator Instructions] Also, all of today's presentations will be recorded and can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Mr. Yuning Feng, CFO; and Keyao He of Yiren Digital, which trades on the NYC under the symbol YRD. Welcome, Yuning and Keyao.

Good morning, everyone, and thank you for your time. Today, we will be giving an introduction of Yiren Digital, our Chinese consumer lending business. And we will be giving a presentation first. And all the questions at the back end, I will go through, and we will see if anything comes along in the deck, we will answer when I do the introduction. And if not, we'll have a Q&A session at the end. So first to begin, the overview of our company, as we know, our company founded -- listed in the United States, in New York's Exchange in 2015. Prior to that, our company has over 80 years of experience in consumer lending, in life and property insurance and consumption and lifestyle business. So these are the three main business units of Yiren Digital. And over the -- in the past 18 years, our business model changed from the off-line business model to online consumer lending, but also the life and property insurance business also transformed from an off-line business model only to an online and offline combined business model. And with the development of our online Internet traffic, and we start our consumption and lifestyle business, along with these two main business units in the past few years. So let me start with our main business unit, the financial service business unit. So -- in summarize, our business connect with -- of borrowers to institutional funding partners. The core business capability of Yiren Digital is our an AI-enabled risk evaluation, AI anti-fraud system along with our marketing system, which [Technical Difficulty] Is it clear now? Okay. And from the front -- where did I lost the signal? Shall we start from this slide? Okay. So our business model in summarize that we connect borrowers with institution funding partners. That's our long felicitation business. So our core value our core capability is our -- combined with three parts. First of all is our ability to connect, to acquire customers from various different online channels, both social media and e-commerce websites, et cetera. And when we acquired -- when the borrower started credit application in our system, we do have our AI risk -- AI-enabled risk evaluation system or antifraud system, which are -- allow us to monitor and evaluate the risk from these borrowers and also our -- at the back end, our operational system, along with e-signing platform, our portfolio management system, et cetera, which allow us to help our institutional funding partners, which consists mostly of banks and consumer finance companies and other institutions to connect them with the correct risk tolerance borrowers than to issue the funding. And we monitor all the lending in our platform and connect with borrower with institutions and our revenue model is to collect service fee from the institution funding partners. So our lending per debt, it's average principle that amount around RMB 6,000 to RMB 7,000. Loan tenure is 3, 6, 9 or 12 months. And on average borrower from us each time they will borrow like RMB 8,000 and the average tenure is mostly within 9 to 12 months. So they have very flexible repayment options. And the -- in the past, we have served over 100 million borrowers. And most of them are aged between 25 to 40, have a stable salary or self-employed in mostly Tier 2 or Tier 3 cities in China. Our customer acquisition strategy is to advertising in most Chinese popular social media platform and e-commerce platforms, which -- namely TikTok in China, Douyin, WeChat and I think the majority of the e-commerce platforms. When the borrowers see the advertisement, they click it and fill in the application forms. And mostly, within 1 to 2 minutes, the risk evaluation model will decide whether or not we can connect the borrower to an institutional partner and to add to what amount and at what risk of the borrower to decide the interest rate that he or she can get from the banks. So that's a summarize of the business model of our lending business unit. So in the past, we have very strong risk control capabilities. First of all, we have like 80 years of experience and data collected in China in creditech business. So this helped us to understand more about the borrowers than our competitors, which have -- might have joined us -- joined the business after we start the business. So with the over 100 million registered users, and we do have a very strong and diverse customer database. And besides the data and the information that we collect in our history, we do have connected with 20 -- more than 20 credit enhancement agencies. And from the various sources of data, we can have over 5,000 dimensions of external data incorporated in our risk model. So this data, both from internally and externally, help us to evaluate the borrower's risk and to avoid any fraud in these loan application process. So using this, we do have a very low delinquency rate, which I will introduce in the later part of this presentation. So the second part of our second main business unit is our insurance business. So we have a licensed insurance broker in China, which named Hexiang, it's -- it start -- it now has 30 branches, nation wide and over 500 insurance agents. And the business model of our insurance business, we do have both life insurance and property insurance products to provide to our clients. So our clients are also both business clients and what we called mass affluent enablers, and more inclusive customers. So for the property insurance, we do provide various property insurance products, including automobile insurance, construction insurance and also products for schools, products for overseas business. In recent years, Chinese company that go aboard and they have the employee -- employers with insurance, which also we have connected with the right insurance company. So along with the business corporate clients, we do -- we also have this consumer products, which includes medicine, health care, travel, leisure, products, wealth & finance products, insurance and engineering & construction insurance. So the business clients in which they purchase insurance, maybe for their business, like engineering & construction are also -- and get insurance for that, for their employees and their employees can also to get personal life insurance from our life insurance products. So these two, both drive the growth of the insurance business unit. And besides that, from this quarter and our insurance team will also start Internet insurance marketing products, which similar to [indiscernible] that sells advertised in social media and in e-commerce platform that provide to wider base of customers of our mostly health and life insurance products. So as of first half of 2024, we do connected 130 partner insurance companies in China. And on the shelf, there are over 10,000 insurance products in our insurance product platform. So to summarize, our revenue model comes from 3 business units, financial service, both from our external funding partners and our licensed subsidiaries to the revenue in the form of loan facilitation, post-origination service fee, and also guarantee service fee, financing service fee. And for insurance brokerage business unit is mostly insurance commissions and lifestyle and service, lifestyles and consumption. It's come from -- the revenue come from sales of consumption service products, membership service and some of the virtual goods. So that's the summarize of our revenue model. Quickly go through our financials of last quarter. So in last quarter, our loan facilitated growth year-on-year 59%. Number of borrowers we served those, up 47% year-on-year. And total premium dropped 20% year-on-year, which mostly due to a change of regulation on the commission in China. And the GMV of our life and consumption business goes up 40% year-on-year. For our consumer lending, financial service business, and you can see in the past 2 years, the growth is significant. And in this year, last in the first half of 2024, we -- in the fourth quarter, we have serviced 1.35 million borrowers. And in the second quarter, 1.49 million borrowers. And the loan facilitated in the first quarter is RMB 11.9 billion. And in the second quarter, we keep the growth to RMB 12.9 billion. So in this year, in the second half of the year, we expect the growth will continue and the number of borrowers -- and both in the number of borrowers and loan facilitated. In the insurance brokerage business, our gross written premiums in this quarter start to go back growing to RMB 1 billion in this quarter. It dropped from the third quarter of 2023 but in this quarter, the team have managed to reverse the decrease of the total gross written premium and the accumulated number of insurance clients continue to grow. And to give more details on the insurance business. In last 2023 to this quarter 2024, the regulation that changed the commission rate of insurance brokerage company in all over the China. So mostly -- most of the insurance brokerage companies in the past year has been -- suffered from the decrease of commission and the increase of competition. But our team tried to manage to reverse the dropping, and we hope in the second half of 2014, we will -- we can see continued growth in insurance business. So on the revenue and net income side. In last quarter, we -- in last quarter, the revenue of the -- the total revenue is RMB 1.49 billion and the growth quarter-on-quarter 9% from the RMB 1.37 billion in the first quarter of 2024. And for the net income, the margin dropped a little bit in this 2 quarters. And part of -- because we do have a -- we do have a competition -- stronger competition that -- in the consumer lending business in China, which causing us another on other side, we do have a different combination of new borrowers and existing borrowers. Now our customer mix is 50% to 60% new borrowers and 40% to 50% existing borrowers in each quarter, which caused us a little bit higher spending on the customer acquisition cost. That drove down a little bit of our profit margin. And on the other side, we do have some more new loan product that we take more risk on our balance sheet. And that change of customer base and product mix caused us a little bit dropping on the net revenue side. Together with the insurance business, the lower -- of the regulation that's causing the lower commission rate. On the delinquency rate, the company continued to maintain a low delinquency rate in both -- among the 15 to 29 days is keep lower than 1%. 30 to 59 days is around 1.4%. And for 60 to 89 days is 1.6%. For future strategy, we will continue to grow, expand our customer base in the financial service business. And in which we will continue to grow new borrowers in our customer base. Compared to our competitors in China, we do have a higher percentage of new borrowers. And we -- now the loan balance is -- our loan balance -- loan facilitated balance is around RMB 20 billion, which also a bit lower than our main competitors in this area in China. So our first priority in the financial service business is continue to grow our customer base and increase line of credits for high-quality borrowers so that we can expand our asset -- our loan balance and also to lower our customer acquisition cost. We do have a new team that specializes in customer operation -- customer service and to increase the existing borrowers and credit lines. And for the insurance brokerage company and the regulation change really -- the regulation changes still impact the sector seriously. So we do try adopt new products and new partnerships to get through this change of regulation in the short term. And we do have a new team that specialize in Internet, online, insurance, new products that -- which we would like to expect to see that in the second half of 2014 can bring us a new revenue mix in the insurance brokerage business. And for international expansion, we do started our lending business in Southeast Asia and also in Latin America. They are still in early stages. We try to maintain a reasonable cost at the local teams. But at the same time, we do have plans to expand to other Southeast Asia countries and to see other opportunities both in Latin America and also other continents. And for the AI upgrade, I don't want to emphasize too much on the technology side. But our IT team now works closely these business teams that should enable us to apply AI in our customer acquisition, in our collection, in our daily operations, customer service and other day-to-day business. We don't expect very different changes that AI can bring to this sector, we think, we will take some time. But we sell the data and the customers that we have on our platform, our IT team, our AI team that will try the best to using AI to minimize the -- reduce the cost and minimize risks and try some new business model also in this financial service area.

I'll go through some questions. I will start with the first few ones. I'm sorry. Cash on the balance sheet. Yes, we do keep a large amount of cash on balance sheet, cash and cash equivalents. That part of, where the cash on our interest income? We do have interest income. But as we -- as you know, our business in China, most of our revenue and accumulated cash are in renminbi. We do have interest income, but -- as you know, the Chinese banks and other institutions, they have very low interest rates. So we do have a plan to improve our treasury management, which also will we foresee in the second half of 2024. How does Yiren compliance with regulatory capital requirement, maintaining optimal capital structure? Yes. As you know, most of our business are loan facilitation business, in which we don't take risks. So in that part of the business, we don't actually have the regulatory capital requirements. We are not like banks. So the business model that allows us to help banks to get borrowers and when the loan facilitated in the bank or institutions that issued a loan to the borrower, we collect a service fee that which not require a reserved capital requirement. But I think in the future, when we start more our risk-taking business that will -- in some of our business, we will need to comply with the license in which we use the regulatory capital requirements. And the foreign exchange risk? Yes. As I said in the last question, most of our revenue comes with renminbi, so it's not U.S. dollar or other currencies. In Philippines and in other parts of the other overseas business, now the size of the overseas business is actually quite small. So for -- currently, we don't actually have a strong risk that come from the foreign exchange. But as also we mentioned in the strategy slide that we are looking to expand to more other Southeast Asia and other parts of the world. When we do that, we do have to hedge against the FX risk. But at the time, and I think we are -- well, the risk can -- we could -- I could say is relative small and controllable. Some -- the question is about the cash reserve and also the dividend policies. So we do have a dividend policy that announced in the last quarter. That which -- in which we will start in October, the first semiannual dividend policy that we will give out no less than 10% of half year net income after tax from the -- starting from this October. So it is a first -- the first dividend will be USD 0.2 per ADR. So it will be paid out on October 15. And the -- to the holders of company ordinary shares of [ records ] of the closed business day on September 30. And we will continue to do that in the future. And buybacks. Yes, we do have a buyback policy in 2022, if I'm not remembering wrong. And that will -- we will also continue to do in the future. The next question is the impact to the business of the recent Central Bank rate reduction. And actually, for us, we are doing a little bit higher interest rate borrower groups than banks. And so actually for that, it makes us either to get a lower cost from our bank partners and the banks are more willing to have -- to work together with us and to reach out to more borrowers, especially online, this capability that banks don't actually have and that may make us business. I think it will help us to get stickier profit margin. I think this is the last question. What model happening do you use for forecast revenue and expense, particularly in content or marketing problems? I don't think we have time to go into much of the details, but we do have -- we have a financial team that comes from both our competitors and some of our investment banks. So we do have a strong forecasting team that allow us to predict the right amount of the money and the loans to the right group of the people. So if you're interested in that, maybe we can communicate through e-mails. I think we are running out of time, so I hope I could answer most of our questions and to summarize. Thank you for your time. And if you're interested, we can well continue to communicate via e-mails or through our IR website. Now that concludes our presentation. Thank you.