Yiren Digital Ltd. (NYSE:YRD) Q3 2019 Earnings Conference Call November 14, 2019 7:00 PM ET

Company Participants

Lydia Yu - IR
Ning Tang - CEO, Yirendai, Founder, Chairman and CEO, CreditEase
Dennis Cong - SVP of Corporate Business Development

Conference Call Participants

John Cai - Morgan Stanley
Eddie Zhou - Credit Suisse
Alex Ye - UBS

Operator

Ladies and gentlemen, thank you for standing by and welcome to Yiren Digital Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

I will now hand over to Ms. Lydia Yu. Thank you. Please go ahead.

Lydia Yu

Hi, everyone. Welcome to Yirendai's third quarter 2019 earnings conference call. Today's call features a presentation by the Founder, Chairman and CEO of CreditEase and CEO of Yirendai, Mr. Ning Tang; and our Senior VP of Corporate Business Development, Mr. Dennis Cong.

Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities and Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yiren Digital's filings the US Securities and Exchange Commission. Yiren Digital does not undertake any obligation to update any forward-looking statements except as required under applicable law.

During the call, we will be referring to several non-GAAP financial measures and supplemental 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 to US GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

I would now pass it on to our CEO Ning for opening remarks

Ning Tang

Thank you all for attending our third quarter 2019 earnings conference call.

I'm pleased to announce that we have achieved another solid quarter of operations in both credit and wealth management businesses. On the credit side, in the third quarter, we are back into growth mode after we have achieved stable credit performance baseline and we expect this trend to continue.

We achieved improving profit and operating cash flow due to both elevated business volumes and better operating efficiencies, as we start to bear the fruit of the synergies realized from the business integration post our business realignment.

We are launching multiple business initiatives, leveraging our combined operation. Just to highlight one of our key operating efficiency initiatives, we are pushing forward with our O2O program and have reached to over 60 cities, in which we repeat borrowers required - acquired through offline channels can now achieve 100% online application and approval process.

For new borrowers acquired through offline channels, we aim to complete menu application review prior to their first branch visit to improve user experience and increase operating efficiency.

On product development front, we are working to directly access PBOC credit system to enhance our credit underwriting process, which should improve our credit performance as well. On institutional partnerships, our total loan facilities from partnering banks have reached RMB35 billion from RMB30 billion last quarter, as we have seen strong interest in our underlying asset from leading financial institutions.

In addition, our technology partnership with Ningxia Bank has shown impressive initial results. Since product launch in May this year, their accumulated net loss has been zero and monthly originations is expected to double in 2020. We hope to replicate and expand this partnership model with other financial institutions.

Next, we have achieved notable results in our wealth management transformation to an asset allocation based online wealth management model, non-P2P asset under advisory as of September 30th, 2019 has increased to RMB629.6 million or USD88.1 million, up 78% from prior quarter. The number of investors in non-P2P products in the third quarter of 2019 has increased to about 20,000, up 35% from prior quarter.

In September, we rolled out our online financial advisory services to investors with AUM exceeding RMB200,000. We noted that the average call time between a financial advisor and an investor is five minutes, which is significantly higher than a telemarketing call.

In July, we launched four mutual fund portfolio products each aimed at targeting a different investment style, which has been very well received.

Next on regulatory update. We are expecting for the roll out of the P2P trial program to take place. However, the timing is currently uncertain. In the meantime, we are adjusting our retail funding as per regulatory requirement and diversifying our funding sources to grow our loan balance through institutional funding.

I would like to highlight also a very positive regulatory update, which is that regulators are currently pushing forward requiring all P2P data to be submitted to PBOC database, which will mark a very significant milestone for the industry. Thank you all.

Now I will turn the call over to Dennis, our Senior VP to review our third quarter business results.

Dennis Cong

Thanks Ning. Hello everyone.

On the credit business side, total volume of loan originations for the quarter was RMB10.5 billion, with about 34% of loan volume coming from repeat borrowers. In terms of loan origination channels, approximately 45.7% of the loans are generated online, while 54.3% are generated offline in the third quarter of 2019.

The cumulated numbers of registered borrowers we served reached RMB85.4 million and cumulative number of borrowers served is close to 4.6 million as of September 30th, 2019.

On institutional funding, we have increased our line of facilities from institutional funding partners to RMB35 billion, this quarter up from RMB30 billion last quarter and we are also delighted to announce that the number of our bank partners has increased to 13 in the third quarter of 2019 and we are expecting further growth in institutional partners demand in the years to come.

On our wealth management business as of September 30, 2019 we have served over 2.2 million investors cumulatively. Total number of active investors in the third quarter of 2019 was close to 586,000 with total AUM of P2P products for Yiren Wealth at RMB40.2 billion as of September 30th, 2019. Average AUM of P2P products per investor remain stable at RMB152,000.

On non-P2P product, our sales volume was RMB767.2 million this quarter, representing an increase of 169.4% from RMB284.8 million as of last quarter, while our ending balance of non-P2P product was RMB645.9 million as of September 30, 2019, showing a rapid growth of 80% from RMB358.6 billion at June 30.

For insurance product, we're pleased to note the average effect of insurance premium per investor has increased from RMB2,000 to over RMB20,000 as of September 30 2019, which is significantly higher than the industry average of RMB5,000, thanks to our highly effective insurance advisors who provide one-on-one customized service to our investors.

Our mutual funds, we launched new mutual funds portfolios in July 2019, which has been very well received by younger investors. The average investment per investor in mutual fund portfolio has increased from RMB400 in April 2019 to over RMB30,000 in September, 2019.

For our financial update, I'll focus on key items of our business operation and financial performance and you can refer the detailed financial results to our earnings. Total net revenue was RMB2.1 billion during the quarter. Net revenue take rate which refers to total net revenue net off allowance for contract asset is 16.3% for the quarter 2019 as compared to 17.7% in the last quarter. This quarter, we maintain our contribution to the credit insurance program at 14% to insure adequate coverage.

Our credit insurance fund remains adequately funded with total balance equivalent to 11.5% of total performing loans covered by the credit insurance program. Sales and marketing expenses in third quarter 2019 was approximately 11.1% of loan volume, as compared to 12.5% in the second quarter 2019, mainly due to increased marketing efficiencies and highly - higher sales team productivity.

Specifically, online customer acquisition costs this quarter was 4.9% of loan volume as compared to 5.3% last quarter. Offline customer acquisition cost this quarter was 11.8% of loan volume as compared to 12.8% last quarter.

Allowance for contract assets has normalized in the third quarter of 2019 to RMB345 million, which is equivalent to 3.3% of loan volume as compared to RMB501 million last quarter, which is equivalent to 5.2% loan volume. Last quarter, we revised future collectability estimates for new loan origination, as well as remaining loan balance.

On the balance sheet side as of September 30 2019, our cash and cash equivalents were RMB2.6 billion. The balance of held-to-maturity investments was RMB8.1 million and balance of available-for-sale investments were RMB426.3 million. As of September 30, 2019, our usable cash maintained at a healthy level at RMB3 billion.

In addition, net cash generated from operating activities were RMB808 million this quarter, as compared to RMB36.4 million last quarter, indicating that we have a profitable and resilient business model. Net cash used in investing activity were RMB924 million this quarter, mainly due to RMB846 million paid out to quite a ease for the quarter's contingent consideration payment that's related to our business realignment that completed earlier this year.

Now, I will pass on to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Cai from Morgan Stanley. Please ask your question.

John Cai

So just want to ask about, firstly, on the asset quality. I think our credit insurance provision ratios remain high at 14%, but it seems that we are back to the growth mode. So just wonder, how should we think about risk and growth going forward? And the second question is about the take rate changes, just wonder if the - it seems that take rates on a Q-on-Q basis declined sequentially. So just wonder what's the factors in addition to the provision increase.

So my third question is about the regulatory update. In light of the current P2P registration uncertainty, we are expanding the institutional funding. So just wonder what's the current drawdown of the institutional funding. And we - and the - do we have any plans to acquire other license like consumer finance or online micro license because of the current regulatory environment. And finally on the contingent liabilities, it seems - it was - declined Q-on-Q basis. Just wonder, if there's any valuation adjustment, I stress, the cash payout effect. Thank you very much.

Dennis Cong

So may be Ning give a little bit update on the regulatory front and our license initially and I will cover the rest of financials, yeah.

Ning Tang

Yes, we are expecting that the P2P trial program, our pilot program shall, yeah, take place, yeah, although the exact timeline is still uncertain, yeah. And so our future strategy will be that we have multiple funding sources for our borrowers from retail investors, from institutional investors and different types of institutional investors, including banks, trust companies, consumer finance companies, micro credit companies so on, yeah.

So such diverse funding source will help our borrowers and we have learned lessons from the US and other parts of the world that limited funding source actually is not helpful. So we continue to strategically expand our funding source. At the same time, we are in full compliance for the upcoming P2P pilot program.

Dennis Cong

Regarding the asset quality, as we have mentioned, we have been adjusting our risk policy early this year to maintain a very conservative risk policy and we have seen the consistent results in the near-term asset performance from both existing vintages as the - as well as new vintages that clear we're reaching a comfortable baseline as Tang indicated from both the overall - the charge-off of historical as well as the new Q1 2019 that we have demonstrated in our press release.

And also the 15 to 89 days delinquency rate has also showed a very healthy trend, so that we have established a good risk performance on our various product lines and channels and that we feel comfortable in terms of the business growth.

So you see our Q3 is up from Q2 and we expect this to continue into the Q4 and the near-term. In terms of the revenue - net revenue take rate, yes, it drops a little bit, I think part associated with provision.

The other part is also the product mix as we integrate with more institutional fundings we have adjusted the serve and part of our pilot portfolio mix that has some impacts on the overall revenue take rate, but it's still a minor adjustment not significant in terms of overall revenue opportunities. And of course that also need to take into consideration of the allowance for contract asset impacts.

And in terms of institutional fundings that continue to be a strategic direction for us as we mentioned we're actually getting more and more interest from the institutional partners in working with us closely.

However, it does take a little bit longer time than what we expect. The reason being that our loan tend to be longer duration larger ticket size and some time the institutional partners are taking a little bit longer time to evaluate the asset performance and they have their own internal process that we go through before we ramp up the volume.

And so right now I think we're maintaining at the similar level, in terms of new loan origination, we're in the 10 or low teen percentage of new loan sales volume, but all these partners are very long-term. We have established a very deep working relationship and we expect this ramp up to continue and we should expect a very stable funding sources from institutional partner coming - in the coming years.

In terms of contingent consideration that's purely the cash payment related to the business realignment that we completed earlier this year. There is no other factors that's purely the cash payment that we paid out during the quarter as the payout schedule we have agreed with our parent.

Operator

[Operator Instructions] Our next question comes from Eddie Zhou from Credit Suisse. Please ask your question.

Eddie Zhou

I noticed that the P2P loan volume on the Yirendai platform side seems to have picked up in October about RMB2 billion versus RMB1 billion in September, I wonder what's changed in October on the P2P funds, is there any change in regulatory guidance? Thank you.

Dennis Cong

I think there is no guidance in terms - also our business policy working in compliance with the regulatory guidance. I think the guidance was more for the total ending balance to maintain at that level or certain trends, but in terms, our new growth, we're still below our average normalized run rate if you're thinking about the loans being paid and new loan originated. So that's why we actually have quite some room to grow even for the P2P side of the business.

Operator

Our next question comes from Alex Ye from UBS. Please ask your question.

Alex Ye

So my first question is about, so do you have an idea of - was the revenue contribution from our non-P2P asset management products. And secondly, regarding loan volume growth outlook, it looks like we are comfortable to continue to grow our loan volume on a Q-on-Q basis in Q4, so - but - what was the magnitude we are looking at, so are we comfortable significantly grow our loan volume or still relatively cautious at this moment and also into - our loan growth outlook into the next year. And thirdly, recently, there has been tightened regulatory size on the loan collection practice. So just wondering any new measures we have taken on that front. Thanks.

Dennis Cong

What's the last question, sorry, there is some stack - what's the last question again?

Alex Ye

Yes, sure. So my last question is about recently there has been an increased regulatory oversight on the loan collection practice, especially the third-party service provider. So I wonder do we take any measures on that front? Thanks.

Dennis Cong

Sure. Yes. So in terms of loan collection, we have as we communicated early on, we have very professional collection teams and services followed by the bank. So we have a very good practice. And we do get certain impacts due to the some of the telecom pilot, but we have made adjustment to overcome those issues. And we have always been [Technical Difficulty] we have never bridged any of those issues. So we don't have to see or have any impact in terms of collections in our business.

Actually the adjustment we've done through our collection policy actually helped stabilize our risk policies recently. In terms of the non-P2P part of business, revenue contribution are still small, but you really have to look at the momentum. If you look at the growth of the non-P2P product, it's very respectful even though is off a small base, but give us a few more quarters, you will see the significant scalability of this business going forward.

And also I think the key is really looking at the number of investors that start to taking on the service of non-P2P products that's actually also growing very, very healthy that usually would translate into a much better business skill in the future. And we have also noticed that some of these non-P2P product investors are actually tend to be the larger OEM customers, they actually have a deeper pocket in maintenance take on more volume as we kind of [Technical Difficulty]

So from growth prospect near term, we will maintain even though we're back in the growth mode, but we'll probably still more control growth mode and you know that this is a risk business that you don't want to overrun. And also we still expect certain volatilities in the industry as some of the non qualified P2P platform are being phasing out.

So we're still cautious, but we feel outside operations were confident given the growth, but the growth, it's probably [Technical Difficulty]. Into next year, we don't have the guidance yet, but as maybe when we are [Technical Difficulty] provide more clarity with the first half of next year how we see the [Technical Difficulty] gross momentum like that.

Ning Tang

Yeah, let me also add that strategically our wealth management business is as important as our lending business and we've - the parent company are quite eager as, yeah, as those been impressive business serving high net worth, ultra high net worth investors in China and our - this did - company Yiren Digital is leveraging the capabilities developed through that process to better serve the mass affluent investor community in China. Yeah, I think this is highly differentiated business model and we strive to build a leading wealth management business [Technical Difficulty].

Operator

Our next question comes from John Cai from Morgan Stanley. Please go ahead.

John Cai

So it's very quick follow-up, I think I saw the - there was one division, there was a spin-off from the company in 3Q. Just wonder if there is any more details or colors about that Division. Thank you.

Dennis Cong

I think that's a very small business, yeah, it's very, very small business. Yeah, it's actually a historical business that we have, that's only stop - actually stopped operation in 2016. So it was just that from transaction perspective that - yeah. So, yeah, there is very small business residues that has not been fully separate, so which has conducted separation in the quarter.

John Cai

Thank you.

Dennis Cong

Yes, it's a discontinued business. Yeah, it's just that when we first complete the transaction, business realignment, we had included them in, but now given this discontinued business, so which is complete - separate, yeah.

Operator

[Operator Instructions] As there are no further questions, I'll pass back to management for closing remarks.

Lydia Yu

Thanks everyone for joining the call today. This concludes our third quarter 2019 earnings conference call.

Operator

Thank you. Ladies and gentlemen, this does conclude the call today. Thank you so much for your attendance. You may now disconnect.