FinVolution : Fourth Quarter 2021 Earnings Conference Call Transcript

ByRochelle W. Stone

Mar 18, 2022

[FINV] – FinVolution Group

Q4 and Full Year 2021 Earnings Conference Call

March 14, 2022, 8:30PM Eastern Time

Officers

Feng Zhang, CEO

Jiayuan Xu, SVP, Finance

Jimmy Tan, Head, IR

Analysts

Yada Li, CICC

Frank Zheng, Credit Suisse

Hanyang Wang, 86Research

Alex Ye, UBS

Thomas Chong, Jefferies

Presentation

Jimmy Tan: Hello, everyone, and welcome to our fourth quarter and full year 2021 earnings conference call. The Company’s results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the Company’s email alerts by visiting the IR section of our website at: http://ir.finvgroup.com.

Mr. Feng Zhang, our Chief Executive Officer, and Mr. Jiayuan Xu, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session.

During this call, we will be referring to several non-GAAP financial 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 with U.S. GAAP. For information about these non- GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

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 results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties are included in the Company’s filings with the U.S. Securities and Exchange Commission. The Company

does not assume any obligation to update any forward-looking statements except as required under applicable law.

Finally, we posted a slide presentation on our IR website providing details of our results for the quarter.

I will now turn the call over to our CEO, Mr. Feng Zhang. Please go ahead, sir.

Feng Zhang: Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. We’re happy to speak with you today following the completion of another challenging year on a strong note.

2021 was a complicated year given the fluctuating macro environment, but our strategic transition towards better-quality borrowers positions us for success amid rapidly-evolving market dynamics. By leveraging our in-house developed technologies and industry- leading digital capabilities throughout our business process, we continued to deliver consistent and robust growth over the past several quarters, with stellar performance across multiple operating metrics. We achieved another set of record-breaking results in the fourth quarter to cap off the year.

As we effectively and vigorously executed our strategy, our fast-expanding global borrower base supported our strong transaction volume growth over the past several quarters. For 2021, our total transaction volume reached an all-time high at RMB137 billion with a year-over-year increase of 111%, exceeding the upper end of our transaction volume guidance range of between RMB130 billion and RMB135 billion.

We attribute our success in acquiring new borrowers primarily to our Real Time Application proactive monitoring technology, which gives us advanced insight into customers’ borrowing habits. Generally speaking, RTA enables us to strategically make efficient and appropriate adjustments, increasing our target screening efficiency by 20% and operational efficiency by 25%.

Furthermore, during the quarter, we surpassed the benchmark of 1 million newly- acquired borrowers across the globe for the fourth consecutive quarter.

We are also pleased to share that as of December 2021, we have successfully registered 189 software copyrights and filed 150 patents in fintech-related areas. Building on our core technology capabilities and execution strengths, we are confident that we will keep our growth momentum rolling into 2022.

Now let me share our major achievements for the fourth quarter. Total transaction volume continued on its solid growth trajectory in the quarter, reaching RMB39 billion, up 81% year-over-year and 2.4% sequentially. As of December 31, 2021, our total outstanding loan balance increased to RMB50 billion, representing an increase of 88% year-over-year and 12% sequentially. These results are a strong testament to our rock- solid technology foundation, which underpins our core competencies in the challenging macro environment.

As we continued to acquire better-quality borrowers, our percentage of loans facilitated at or below IRR 24% increased to 78% in the fourth quarter from 59% in the previous quarter. Also, we further reduced our average borrowing cost by 1% quarter-over-quarter to 24.3%, reflecting our relentless efforts to pursue financial inclusion and align with regulatory directives.

As we progressively shift to better quality borrowers, we continue to innovate our fraud detection and risk assessment models through enhancements in our Artificial Neural Networks which can be used to effectively predict future possible trends based on past data. Coupled with our prudent approach towards risk management and our advanced credit risk assessment model, our credit risk performance has remained stable. Our 90- day plus delinquency rate remained low at 1.26% compared with 1.56% in the same period of 2020 and the vintage delinquency rate for the fourth quarter is expected to be around 2.3%.

While achieving strong growth in key operational metrics, we also progressively improved earnings quality and our overall funding structure. As we continue to augment and optimize our mix of funding partners, funding sources on our platform become increasingly diversified while remaining stable and ample. Historically, liquidity from financial institutions in the fourth calendar quarter is weak and typically imposes funding constraints.

However, during the fourth quarter of 2021, we achieved quarter-over-quarter transaction volume growth, validating the strong relationships and firm foundation of trust we have established with our institutional funding partners. We have cumulatively cooperated with over 60 financial institutions in different regions and have a robust pipeline in place.

Furthermore, we continue to fortify our relationships with institutional partners, reflected by higher transaction volume in our capital-light model, which contributed 18% of total transaction volume in the quarter.

In addition to our consumer finance business, our operations aimed at empowering small business owners also maintained their steady growth momentum. We continued to strategically expand our offline sales team, which now boasts over 1,000 employees and is well-placed to further complement our customer acquisition strategy.

During the quarter, the number of small business owners we served swelled to 507,000, representing an increase of 161% from the same period last year, while the segment’s transaction volume increased to RMB8.6 billion, contributing 22% of total transaction volume for the period. In 2021, we empowered 826,000 small business owners across multiple sectors such as retail, wholesale, food, beverages and small manufacturers and facilitated RMB27 billion of small business loans, representing 20% of total transaction volume.

Serving small-business financing needs is strongly aligned with the government’s objective to promote quality financing access for SMEs, especially in the aftermath of the global pandemic. Our corporate strategy for supporting the backbone of China’s economy

and injecting new vitality into small businesses is another testament to FinVolution’s commitment as a responsible corporate citizen.

Moving on to our international expansion. Despite the resurgence of Covid-19 in Southeast Asia, we achieved transaction volume of RMB3.7 billion in international markets in 2021, representing an increase of 270% year-over-year.

International new borrowers in 2021 accounted for 32% of our total new borrowers, further demonstrating that our suite of technologies spanning from customer acquisition to loan collection can be seamlessly duplicated into new geographic markets. Additionally, we continued to deepen our partnership with Bank Jago and actively explore potential partnerships with other players across different countries.

It is worth noting that as we strategically shift towards better-quality borrowers, we have significantly increased the proportion of installment loans in our international business operations. Meanwhile, we remain focused on improving our risk metrics and rolling out more innovative products and services to enhance our offering mix.

Also, we redoubled our efforts to develop additional cooperations with renowned partners, further broadening our presence in the region. We have great confidence that we will emerge as one of the leading players in the region.

In summary, our stellar performance in 2021 laid a solid foundation for us to drive sustainable, quality growth in the long run. As we enter into 2022, we remain dedicated to refining our risk assessment and management framework with prudent principles and advanced technologies, optimizing our product mix toward ongoing risk metrics improvement, and acquiring better-quality customers.

Our outstanding risk management system and strong overall execution will enable us to further strengthen our leadership position in the industry. We believe that we are well positioned to capitalize on the tremendous market opportunities ahead of us for years to come and remain committed to returning greater value to our customers, shareholders and all stakeholders with better business scale and quality.

Last but not least, I’d like to provide an update on our ESG performance, which we believe drives growth and leads to long-term value creation. We are proud to have received a “low risk,” ESG rating from Sustainalytics, a leading independent global provider in ESG research, ratings and data. Sustainalytics assessed our strong performance across a broad range of ESG metrics and rated us as low risk, commending our relentless commitment to the robust management of all material ESG risks and opportunities across our businesses.

We are firmly convinced that our long-term strategic plan, including financial as well as environmental, social and governance goals, will guide FinVolution to new heights. As we encourage all of our people to take part in this critical plan, our efforts are organized around our mission of leveraging innovative tech to make financial services better.

With that, I will now turn the call over to Jiayuan Xu, who will discuss our financial results for the quarter.

Jiayuan Xu: Thank you, Feng, and hello, everyone. Welcome to our fourth quarter and full year 2021 earnings call. In the interest of time, I will not go through all of the financial line items on this call. Please refer to our earnings release for further details.

As Feng mentioned, we are delighted to report that we closed 2021 on a strong note along with another quarter of record profitability. Our accomplishments for 2021 were highlighted by transaction volume growth in 7 consecutive quarters and diversification of funding sources, as well as a substantial increase of 4.4 million new global borrowers, reflecting our capabilities to continually gain market share both domestically and internationally.

Driven by our ongoing efforts to optimize our operations, robust execution of our overall strategy and skillful deployment of our technological capabilities across businesses, our net revenues for the fourth quarter rose to RMB2.4 billion, up 32% year-over-year.

We also delivered a healthy non-GAAP operating profit of RMB560 million and maintained a solid balance sheet with RMB10.7 billion in total shareholders’ equity.

During this quarter, our average borrowing cost reached 24.3%, compared with 25.3% in the third quarter of 2021 and 26.4% a year ago. We are certain that we have the capability and we are on track to facilitate all our loans to be at or below 24%.

Despite the rising contribution from our capital-light model and the regulatory cap on borrowing rates, we have successfully maintained the overall take rate at around 4%, compared with 4.2% in Q3. Given our partners’ support and our ongoing efforts to enhance operational efficiency, we are confident that the borrowing cap’s impact on our financials will be minimal.

While our capital-light model proportion has grown throughout the year from 2.3% in the first quarter to 18% in the fourth quarter, our leverage ratio, which is defined as risk- bearing loan balance divided by shareholders’ equity, remains stable at 4x.

We generated cash flow of RMB1.2 billion from operations in Q4, up 12% from the same period last year.

Notably, we further increased our unrestricted cash and short-term liquidity position to RMB 5.6 billion in the quarter compared with RMB 5.1 billion in Q3 and RMB 4.6 billion in the same period last year, a testament to the robustness of our balance sheet.

During the fourth quarter, we continued to target higher-quality borrowers with attractive borrowing rates as part of ongoing refinements to our customer acquisition strategy. Our customer acquisition channels remained diversified across online and offline sources, ranging from online information feeds, internet search engines, and mobile app stores to customer referrals and our strong offline direct sales team, supporting a healthy and stable customer acquisition cost.

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