360 DigiTech, Inc. (NASDAQ:QFIN) Q3 2022 Earnings Call Transcript

360 DigiTech, Inc. (NASDAQ:QFIN) Q3 2022 Earnings Call Transcript November 16, 2022

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech Third Quarter 2022 Earnings Conference Call. Please also note today’s event is being recorded. At this time, I’d like to turn the conference call over to Ms. Mandy Dong, IR Director. Please go ahead, Mandy.

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Mandy Dong: Thank you. Hello, everyone, and welcome to our third quarter 2022 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Xu, our CFO and Director. Before we begin the prepared remarks, I’d like to remind you of our Safe Harbor statement in our earnings press release, which also applies to this call. We may refer to forward-looking statement based on our current plans, estimates, and projections. Also, this call includes discussions of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP ones. Last, unless otherwise stated, all figure mentioned are in RMB. I will now turn the call over to our CEO, Mr. Wu Haisheng.

Wu Haisheng: Hello everyone. I am very happy to report another strong quarter. First of all, let me share some recent developments in the market environment. China’s consumer finance industry has reached from rapid extension to quality growth in the past two years. The industry has achieved substantial grants in preventing systematic risks protecting consumer rights and benefits, driving compliant business operations and promoting competition. This has created a healthy ecosystem for the development of the consumer finance market. Over the past two years, the industry regulatory frame work gradually come into shape and the rectification project of the platform economy continued to progress. Currently regulator landscape had settled down in an article titled presenting and improving modern financial supervision published in the guide book of the 20th National Congress of the Communist Part of China Mr. Guo Shuqing, the Chairman of CBIRC said, financial innovation must be conducted under the premise of prudent supervision.

We shall impose normalized supervision on the financial business of the internet platform companies and they promote the healthy, sustainable development of the platform economy. This implies that the Fintech industry enters into the state of regular supervision. Since the beginning of 2022, the macro economy and whole income have put pressure on China’s consumer and in terms of market demand and asset quality. However, the market started to slowly improve in Q3 as we saw credit demand began to gradually recover and asset quality became relatively more stable than Q2. Meanwhile financial institutions demand for high quality assets continue to inject liquidity into the industry boosting funding supply efficiency. Now moving on to our operations.

Given the macro environment with complexity and uncertainties we maintained a prudent operating strategy and a leverage technology to drive quality growth. Thanks to our practical, prudent, and risk management first operating philosophy. Our business demonstrated a resilience and strength in several key areas, despite the macro headwinds. First, we achieved solid progress in balancing growth with asset quality. In Q3, total origination and facilitation volume was RMB110.7 billion, up 13% both year-on-year and Q-on-Q. Outstanding loan balance was RMB160 billion, up year-on-year and 6% Q-on-Q. As a leading brand for Credit-Tech service in China, our 360 Jietiao brand became more and more well known. At as of the end of Q3, cumulative number of registered user exceeded 200 million for the first time.

The cumulative number of users receiving credit lines and the conducted draw down on credit was approximately 43 million and 26.3 million, respectively, up by 17.6% and 12.8% year-over-year. Since the Q3 of 2021, we have proactively reduced pricing and optimized user structure in response to market and regulatory change. The decent progress in these areas is actively to mitigate the negative impact of the macro environment. As our existing loans gradually reach maturity, our average price decreased slightly from Q2. Our asset quality significantly improved. Day one delinquency rate went down to 4.5% in Q3, from 4.9% in Q2, and is still improving. The M1 collection rate increased to 86.4% in Q3 from 85.2% in Q2. While updating customer base, we continue to optimize business operations on high quality users to increase their life time value based on our experience.

High quality users are usually more stable in credit demand the repayment capability. Therefore they generate more considerable long-term value for our business. In terms of key operating metrics, the average per user and average ticket per draw down in Q3 were more than RMB14,000 and RMB8,000 respectively, and 39.8% year-on-year. The average loan tenure also increased to 12 months in Q3, roughly one month longer, compared to the same period last year. We believe that an upgraded customer business will translate into enhanced operating efficiency and the more stable business performance in the long-run. On the customer front, as we upgraded our customer mix and accumulated better know-how about our high quality users, we will optimize the structure of our customer acquisition channels.

This greatly improved our capability and the efficiency to our acquired target users in Q3. The number of new user with granted credit line includes to 1.71 million, up by 19% Q-on-Q, while our marketing expense remained almost flat, compared to Q2. The acquisition cost per user was granted credit line declined by 15% from Q2. Meanwhile, we further expanded and diversified the customer acquisition channels by working with different types of traffic platform, including short and long videos, social media, search engines, and food delivery etcetera. In addition, we improved our ability to identify users, especially high quality users and enhanced efficiency of user acquisition by upgrading our RTA models and the joint lease developing models with these past ones.

For instance, empowered by our upgraded RTA models, our ability to identify device improved to 90% in Q3 and our ability to identify high quality user improved by more than 20% Q-on-Q. This greatly magnified the effectiveness of our online advertising. We also applied such capabilities to other channels such as app stores, which will further improve our efficiency in these channels as well. As we continue to advance our tech-upgrading strategy, our capital-light and other cap solution business accounted for more portion in Q3. We are a tax driven company empowered by innovation with cyber security in our DNA and strong capability in big data intelligence. We help financial institutions establish their credit infrastructure and empowered them in the full business operation flow with our big data analytics and tech solutions.

In Q3 loan originated and facilitated under the capital-light model and other tax solutions accounted for 58.4% of the total loan volume, up by 2.6 percentage points . And of the end of Q3, we cumulatively partnered with 58 financial institutions under the capital-light model. We also refined and upgraded our fintech SaaS product line. We transformed our end-to-end credit system into based on functionality. Additionally, we innovatively support a hybrid cloud model where financial health service and local deployment work side-by-side featuring set-up of retail credit infrastructure in 20 days online and offline average and system deployment in full compliance. Our new solutions offers more in the medium-sized one-stop solutions of transforming and growing their retail credit business.

Going forward, as we facilitate more transactions for our platform with stable asset quality in good track record. We will expand our collaboration with financial institutions in depth and breadth. This will further boost the percentage of our capital-light and the tax solution business in the total mix in the long run. Thirdly, our funding structure and funding cost both improved significantly with ample liquidity in China’s financial system this year. Financial institutions have strong demand for high quality assets. As a leading credit tax service provider, our assets are in high demand given our strength in scale, data, and risk management. These allow us to optimize the mix of our funding partners, obtain more flexible funding options and reduce funding costs.

As of the end of Q3, we partnered with 141 financial institutions, including more than 10 joint stock banks and a major rural and urban commercial banks with over RMB1 trillion AUM, giving us highly diversified funding source. Our funding cost for value driven loan decreased by roughly 30 basis points sequentially to 6.5% and we expect it to sustain at a low level in Q4. We issued RMB2.7 billion of ABS in Q3 at an average funding cost of 5.0%. As we continue to optimize our customer mix, our funding and advantage will bring out more. Fourthly, on the regulatory front, the project of the platform economy has entered the ending phase. We maintained close communication with the regulators as we implemented our registration plan. At the end of Q3, we have completed most of the required rectification items and received a positive feedback from regulators.

For the credit agency report or in Chinese, we are implementing the transforming plan together with credit agency and our founding partners. In Q3, we facilitated the very first loan in the new credit rating system in and received recognition from the regulator. We are now proactively implementing the plan. Here, let me provide an update on our secondary listing in Hong Kong Stock Market. This morning, we submitted a posted hearing information path, PHIT in short, to the of the Hong Kong Stock Exchange. We have taken the interest of our current shareholder into full consideration in pursuing this listing. We believe that we will be able to optimize our investor structure and boost liquidity through the Hong Kong secondary listing. While enhancing our operations, we always keep in mind our social responsibility.

Our mission is to enable our for people by providing safe, convenient and inclusive Fintech service for consumers and household through technology innovation. By improving financial institutions we have built up tech solutions powered by our AI and cost computing. We have to improve the quality and efficiency of financial service. We stand consumer whose need is to be or unmatched. While maintaining the high standard of risk management we aim to make financial surveys accessible to all in our more and efficient manner and to better serve the real economy. Well bare in mind of our social responsibility by giving back to society and providing support to the disadvantage. As part of our efforts to drive rural revitalization and the common prosperity in China.

In September this year, we donated RMB1 million to . The funds will be used to building the county into administration model for rural revitalization. Looking back at the past three quarters, we navigate through a constantly changing market by planning and a prudent operating strategy, despite multiple headwinds in the macro environment. We achieve solid growth and improved our risk performance demonstrating the strong resilience of our business. Key message show that our business is on track and we are confident we have met our guidance for 2022. Going forward, despite ongoing challenges in the macro environment remain unchanged. That is promoting financial inclusiveness through technology to better support a real economy and create more value for society.

There is still tremendous unmet amount for credit from both consumers and the financial institution. We believe based on our prudent approach to operations and risk management, our business can write-through the current business cycle and capitalize on the growing momentum whilst market recovers. Only under the prudent strategy, we can navigate the fluctuations and achieve steady and sustainable long-term prosperity. Moving ahead, we will continue to generate value for or shareholder through our solid performance.

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Alex Xu: Okay. Thank you, Haisheng. Good morning and good evening everyone. Welcome to our third quarter earnings call. Before I start my regular update, let me first introduce a new member of our capital market team, Ms. , recently joined us as a Senior Director of Capital Market. She will be providing valuable insights, experience, and the leadership to our capital market and IR team. With our upcoming listing in the Hong Kong Stock Exchange, we really look forward to having and other team members offer better services to our shareholders and broader investment community. As Haisheng discussed earlier, we delivered another solid quarter in changing macro environment. From July to September, demand for consumer credits through our platform grew sequentially each and every month, although the velocity and the magnitude of such improvement were modest.

During the quarter, we continued to push for steady improvement in overall asset quality by further engaging high quality new borrower base. Overall day one delinquency has been on a steady declining trend month-after-month so far in 2022, against a difficult macro trend early in the year. It was 4.5% for Q3 versus 4.9% in Q2 and further declined to 4.3% in October. The continued improvement in day one delinquency further validate our strategy, strategic focus on high quality user segment. 30-day collection rate also improved in Q3 and reached the best level in 2022. During the quarter, we resumed most standard collection activity to the pre-COVID lockdown level, which drove the improvement of the metrics. Once again, we see clear outperformance by new borrowers versus existing borrowers.

Total net revenue for Q3 was 4.1 billion versus 4.2 billion in Q2 and 4.6 billion a year ago. Revenue from credit driven service capital heavy was 2.9 billion, compared to 2.9 billion in Q2 and 2.6 billion a year ago. The year-on-year growth was mainly due to growth in on balance sheet loan volume, more than offsetting the negative impact from decline in average pricing of the loans. Capital heavy facilitation revenue take rate improved slightly versus Q2, mainly due to lower funding costs and the longer loan tenure. Revenue from platform services capital light was 1.2 billion, compared to 1.2 billion in Q2 and 2 billion a year ago. The year-on-year decline was mainly due to product mix change in platform services and decline of average pricing of capital light loan facilitation.

During the quarter, capital light loan facilitation, ICE and other technology solutions combined account for roughly 58% of total loan volume. Given the still changing microenvironment, we continued to increase the portion of loans processed through ICE and other technology solution to further mitigate potential risks. These solutions normally have different commercial terms, compared to the regular capital light loan facilitation. In the long run, we will continue to pursue tech driven business model, while striking a balance between various form of non-risk bearing solutions based on macro environment and operational conditions. During the quarter, average IRR prices of the loans we originated and/or facilitated declined modestly to just below 22%, well within the 24% rate cap requirement.

We expect pricing to be relatively stable for the coming quarters. Sales and marketing expenses increased by approximately 2%, sequentially in Q3. The slower pace of increase reflect our continued effort to improve the efficiency or effectiveness of our user acquisition system and drive cost efficiency. Please note, during the quarter, we added approximately 1.7 million new credit line use, compared to approximately 1.4 million in Q2. Unit cost to acquire a new credit line user declined approximately 15% sequentially. As such, average cost per dollar amount new credit line also declined by similar magnitude Q-on-Q. As always, we will continue to use lifecycle ROI and LTV as key metrics to determine the pace and scope of our user acquisition strategy to ensure the sustainability and the profitability of our operations.

Overall, risk profile of our loan portfolio continue to improve in Q3 due to the contributions from new loans from higher quality user, but impacts from micro uncertainty and the latest outbreak of COVID case across the nation were still somewhat visible. Although we continue to take a prudent approach in booking provisions against the potential credit loss, re-evaluation of previous quarter’s provision yield sizable write-backs as micro condition improved Q-on-Q. Total new provisions across four different categories for loans originated and facilitated during the quarter was approximately 1.8 billion, while approximately 300 million previous provisions were written back. With strong operating results and increased contribution from capital light model, our leverage ratio, which is defined as risk bearing loan balance divided by shareholders’ equity was at historical low of 3.8x in Q3, compared to 4.3x a year ago.

We expect to see rather stable leverage ratio for the time being until capital light contribution grow beyond bound in the future. We generated approximately 1.6 cash from operations in Q3, compared to 1.1 billion in Q2. The significant sequential increase in operating cash flow was mainly driven by better working capital management. If you recall, last quarter due to some COVID-related administrative procedure delays, we were unable to collect certain receivables in time. Those receivables were eventually settled in Q3, boosting our cash flow. Total cash and cash equivalents was 10.8 billion in Q3, compared to 11.4 billion in Q2. Non-restricted cash was approximately 7.2 billion in Q3 versus 7 billion in Q2. In the last couple of quarters, we took more conservative approach to deploy our cash in day-to-day business, mainly due to micro uncertainty.

Ideally, a significant portion of our cash would normally be allocated to support the security deposit with our institution partners or to fund balance sheet lending in normal business growth. Non-GAAP net profit was 1.04 billion, compared to 1.02 billion in Q2. As we continue to generate healthy cash flow from operations, we believe our current cash position is sufficient to support the growth of our business to invest in key technologies to satisfy potential regulatory requirements and to return to our shareholders. In accordance with the dividend policy approved by our Board last year, we declared another quarterly dividends of US$0.16 per ADS for Q3. Finally, regarding our outlook for the fourth quarter. Although we managed to deliver a solid operating and financial results so far this year, in a very challenging macro environment.

We still want to maintain a prudent approach to plan our business for the near-term, particularly given the recent resurgence of COVID cases nationwide and the subsequent restricted measures taken by local authorities. At this junction, we expect total loan volume for Q4 to be between RMB102.5 billion and RMB112.5 billion, representing year-on-year growth of 6% to 16%. As always, this forecast reflects the company’s current and preliminary views, which is subject to material change. With that, I would like to conclude my prepared remarks. Operator, we can now take some questions.

Q&A Session

Operator: Thank you. Your first question comes from . Please go ahead.

Unidentified Analyst: Okay, then. I will do the translation part. So, the first one is about the loan structure of the origination volume, so I noticed that you’ve disclosed origination volume of the risk management task and I was wondering if you could elaborate more about the growth trend and it’s contribution out of the total in the future and how we balance the contribution between the capital light and the risk management side when we cooperate with a new financial institution? This is the first one. And the second one is about the customer acquisition. I noticed that our cost control of sales and marketing expenses this quarter been effective and average customer acquisition cost on the new users with credit lines has dropped a lot. So, can you give us more color on what have been done differently on the customer acquisition strategy this quarter compared with before and what is the trend in the future? Thanks.

Wu Haisheng: Okay. Let me translate. Tax upgrading has always remained our long-term strategy for our company. In the recent years, we gradually advanced to more tax solutions starting from capital light to ICE to models. Recently, we are hybrid new business model that provides both our leading credit tax system and operation agent service. All of these tax surveys caters to customized need of different financial institution. In this year, we are exploring different models together with various financial institutions. Going forward, as we serve more financial institution customers and transact more loan volumes under this new model. We can further our products pursuing higher take rate model and serve more customers. This new tech model cannot only boost our tech solution business portion and sustain our business sustainability, but also open additional markets for our long-term growth.

The reason to our customer acquisition effectiveness is starting from the end of last year, we spent a lot of efforts on upgrading our IT infrastructure for online customer acquisition, which starts to bear fruit recently. Moreover, we also further expand and diversified our customer acquisition channels. For example, we not only upgrade our online advertising channels, but also apply our team model on channels. And also, we cooperate with a lot of traffic platforms, including the platforms, app stores, etcetera. In addition, we pay close attention to the market. For example, this year, there is a very popular mobile game in Chinese . We closely watched the market with that opportunity to acquire our group quality customer. As far as we know, we are only credit tax traffic benefit of .

Overall, we will continue to take the prudent business approach and that’s kept long-term life time value of our customers in our operation. We not only just care about the short-term cost for our customer acquisition. We expect good quality customers will bring down cost and create more value. Next operator?

Operator: Thank you. Your next question comes from Hans Fan from CLSA. Please go ahead.

Hans Fan: So, I have two questions. This is Hans Fan from CLSA. First one is regarding the Hong Kong Listing plan, congratulations to that because it is the first online in ADR of China to go back to Hong Kong for releasing, just wondering about the details regarding lines and also is there any plan to go for primary listings, ? So, yes, that is the first question. Second one is more about APR. Currently, we are seeing in the past few quarter, our APR has been on a downtrend, but just wondering what’s the outlook for APR if we consider the demand side and also regulatory direction and also our strategy? Thank you very much.

Wu Haisheng:

Alex Xu: Okay. Sure. So, for the Hong Kong listing time table, as you know we just released the PHIP this morning and the €“ basically our intention is to follow the normal procedure of the Hong Kong Exchange to push for the final official perspectives release and then the marketing roadshow and then the listing. So, that’s our intention. In terms of exactly how many days or how long it will take, you can refer to some other cases, I believe the normal course in the regular basis, somewhere within two-weeks timeframe, so that is roughly. And secondly it is more about the in the future. That certainly is an area or the direction we’re kind of looking at seriously. Because there are certain benefits to become listing company Hong Kong, but I guess firstly, you need to finish this secondary listing and then when you meet certain criteria’s then you can apply for the dual primary.

So, it’s kind of a step-by-step saying, we are just right now still trying to finish the first step and somewhere down the road when the condition is ready, we are pursuing the next one.

Wu Haisheng: In Q3, we see the overall pricing got lower little bit compared to Q2. This is mainly due to our existing loan gradually ran through maturity. Going forward as we see the loan mix from our new customers and old customers that are relatively stable we’ve backed this pricing to remain stable.

Hans Fan: Thank you very much.

Operator: Thank you. You next question comes from . Please go ahead.

Unidentified Analyst: Hi. Thanks management for taking my questions. This is . I have two questions regarding the results itself. The first question is regarding the loan pricing, just wanted to know what exactly is the new loan pricing for the loans granted throughout the third quarter this year? And second question is regarding the loan as Mr. Xu just mentioned, we’re seeing better loan demand in the third quarter compared with the second quarter. So, in our view what is the typical profile that is demanding more new loans? Where are this better loan demand come from? For example, which sectors or segments? Thanks a lot.

Wu Haisheng: Yes. price in Q3 is little bit lower than 22%. In terms of the business nature, actual consumer loan is quite non-technical. We see this demand gradual recovery comes from the customers in the areas that are previously .

Alex Xu: Okay. I just want to probably add a little bit color on that. So, to your question, really on the , we’re not really particularly tracking their professional, you know kind of categories then they were seeing. So, that’s not the kind of the focus point and then also that’s not the kind of data we can provide in terms of which professional getting better in terms of the improvement, but just like Haisheng mentioned, if you €“ you sort can imagine that, you know for those areas that have been locked down, for example in Shanghai during the March, April, and May period when the lockdown get released there certainly will be a pretty noticeable rebound in demand. So, that’s kind of a driven addition part, driven this recovery in the third quarter. Thank you

Unidentified Analyst: Okay. Thanks a lot. Understood.

Operator: Thank you. Your next question comes from Thomas Chong from Jefferies. Please go ahead.

Thomas Chong: Thanks management for taking my questions. My first question is about the competitive environment, given that the API is trending down for a lot of the Fintech companies, just want to get a sense about how we should think about landscape in the future? And the second question is about comments about the trend in recent quarters. And my third question is about Q4 guidance. Given the pandemic situation just want to get a sense about the high-end and the low end of the guidance and under what scenario should we expect to hit a low end, should we expect the pandemic to worsen from the current situation? Thank you.

Wu Haisheng: First of all, from the points operator since the 429 in last year, with at least for this meeting. More competitive in compliance deals in the future. Secondly, if you look at the I want to point out, number one, the credit market is large market with multiple layers, different players make cross-over across the different layers a little bit. Secondly, this is the last market that we do not see that different players will compete directly head-to-head. There are two factors when we consider ticket-size. Number one factor, considering the macro environment since we took the prudent approach that risk management strategy will not drive up our ticket-size. Second point, as we are continuously upgrading our customer base this year, we are seeing the good customers can bring more value, create longer life time value and larger ticket-size.

As for our outlook for Q4, there are several factors we take into consideration. Number one, there are due to the operation of banking industry. However, as everybody knows there are sufficient China financial system this year, we did not see this factor come into effect this year. Second reason is the macro environment and . This one, we think is the major concern for our guidance.

Alex Xu: Sure. Thomas, I just want to add a little bit to your last question regarding the Q4 guidance. Basically, the guidance reflects our view of the current sort of micro condition. Obviously the Chinese market these days are very dynamic given the COVID-related policy changing or pending changing as well as a reaction by the local authority to those kind of new COVID policies. We heard different kind of messages, some say the €“ some certain local areas are more aggressive to kind of a reopening, where some others still maintain kind of restricted kind of stance there. So, it is kind of a changing dynamic, but based on what we can see today, I think the guidance we provide in the Q4 is within a comfortable level. Then obviously if say for the second half of this quarter, since getting better then we will probably see better performance and vice versa. So, that’s only based on information we get today.

Thomas Chong: Thank you.

Alex Xu: Thank you.

Operator: Thank you very much. There is no more questions. Management, back to you for the conclusion remarks.

Alex Xu: Okay. Thank you again everyone to join us for this conference call. If you have any additional questions, please feel free to contact us offline. Thank you. Have a good day. Bye-bye.

Operator: Ladies and gentlemen, this concludes today’s call. You may now disconnect.