Yiren Digital Ltd. (NYSE:YRD) Q1 2023 Earnings Call Transcript

Yiren Digital Ltd. (NYSE:YRD) Q1 2023 Earnings Call Transcript June 9, 2023

Operator: Thank you for standing by, and welcome to the Yiren Digital First Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Lydia Yu. Please go ahead.

Lydia Yu: Thank you, operator. Hello, everyone, and welcome to our first quarter 2023 earnings conference call. Today’s call features prepared remarks by the Founder, Chairman and CEO of CreditEase and our CEO, Mr. Ning Tang; and our CFO, Ms. Na Mei.; Mr. Raymond Fang, Head of our Consumer Finance, will join the presenters in the Q&A questions. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provision 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 than what we view expressed today. Further information regarding future risks, uncertainties or factors is included in our filings with U.S. SEC.

We do not undertake any obligation to update any forward-looking statements as required under the relevant laws. During this call, we will be referring to certain 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 with the U.S. GAAP. For information about those non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass the line to Ning, our CEO, for opening remarks.

Ning Tang: Thank you all for joining our earnings conference call today. First, an update on our insurance brokerage business. Total gross premiums reached more than RMB923 million, up 15% year-over-year, of which life and property insurance policies contributed 57% and 43%, respectively. The increase was mainly driven by life insurance policies, which increased 28% year-over-year, significantly outpacing China’s life insurance industry premium growth of 8.9%. Our strategy to drive rapid business growth continues to be product innovation, customization, agent development and digitization. We are invested in our agents and have established programs to help them improve professional skills to enable them to broaden their service scope to cross-sell and up-sell products and services, matching customers’ evolving needs throughout their entire lifecycle.

We noted initial success this quarter with a significant uptick in first year life insurance premiums from existing property insurance policyholders. On property insurance, as mentioned on our last call, as part of China’s Belt and Road initiative, a global infrastructure development strategy. China’s outbound investment and construction projects are expanding at a fast pace, bringing new scenarios for insurance protection and coverage. Hexiang, leveraging its advantages in product development, professional risk management expertise, reinsurance qualifications as well as partner — is now providing reinsurance for overseas construction insurance policy. We estimate the potential market size for this insurance segment to be at least RMB10 billion.

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In the first quarter, total premiums for this product segment grew close to 30% quarter-over-quarter. And we expect to see a continued increase over the rest of the year. Next, on the credit side. In the first quarter of 2023, total loan volume was RMB6.4 billion, representing a 39% increase year-over-year. Total number of borrowers in the quarter increased 71% from prior year to 872,000. The increase was primarily driven by our revolving loan product, Yi Xiang Hua, which actually saw volume increase, 88% from prior year due to increasing demand. MAU on our Yi Xiang Hua platform is reaching close to 2.2 million users as of quarter end, increasing 8% from prior quarter. As our active user base on the platform continues to expand, we have also seen an uptick in our revenue from electronic commerce services, which we consider as risk-free revenue and includes services like recharging online video and streaming accounts and popping up phone credits.

These e-commerce services also present an opportunity to establish our own membership ecosystem, enhancing customer loyalty and engagement. On the funding front, as the number of our funding partners continue to grow and we continue to diversify our funding sources, we noted a 16% decrease in institutional funding costs this quarter from prior year. On asset quality, we maintained a conservative risk management policy this quarter amid a slower-than-expected macro recovery, and we noted an improvement in delinquencies with FPP 30-plus delinquency rate improving to a historic low of 0.6% compared to 0.7% last quarter. This quarter, we started to execute on our international expansion strategy in which we hope to leverage our extensive expertise in the consumer finance sector to promote greater financial inclusion.

I’m very excited to report that we have completed establishing a wholly owned subsidiary in the Philippines, which owns an online lending license and financing license from the nation’s Securities and Exchange Commission. We recently beta launched under the brand Easy Peso and have experienced a substantial surge demand — in demand since then, already accumulating over 190,000 registered users on our app. As of today, we have completed the facilitation of the first loan on the platform and is conservatively controlling our scale while focusing first on refining and enhancing our risk models. We see enormous demand for financial services in these underserved emerging markets, and we expect international markets to become a new growth driver for our business.

Going forward, we plan to accelerate our pace of penetration in the Philippines, while investing in operational flows to increase automation and enhance cost efficiency. At the same time, we will also start evaluating potential opportunities in other regions around the world. Recently, we’ve been witnessing the rise of ChatGPT and generative AI technology. And we believe that the application of generative AI can disrupt and bring sweeping changes to the financial industry. This quarter, we established an AI lab that will be focusing on utilizing ChatGPT, large language models and generative AI technologies to develop applications in each of our business sectors. For example, using personalized chatbot to provide 24/7 customer service for our borrowers or utilizing technology to help our agents increase cross-selling and up-selling.

With the launch of our AI lab, we aim to improve the efficiency and effectiveness of our operations, enhance user experience and drive business growth. Lastly, I would like to say a few words about the management transition we have announced. George is stepping down as CRO, and on behalf of the Board, I would like to express my sincere thanks to George for his outstanding contributions to the Company throughout his years. Concurrently, the Board has selected Ms. Yang Bin to serve as the Company’s Chief Human Resources Officer. Together, we are excited to propel the Company to new levels of success. With that, I will now pass it to Na, who will go through the financials for this quarter.

Na Mei: Thank you and hello everyone. On this call, I will only focus on the key financial highlights. Please refer to our earnings release and IR deck for details further details. In the first quarter of 2023, our total revenue reached RMB986.3 million, representing a 14% increase year-over-year and a slight decrease of 9% from prior quarter. The quarter-over-quarter decrease was mainly driven by change in our loan volume. Our total facility this quarter was RMB 6.4 billion, representing a 39% year-over-year growth and a 5% decline by prior quarter. The quarter-over-quarter change can be due to adjustments in product mix. Basically, we actually make adjustment to our small business loans, while we plan on growing growth in our small revolving loan sector.

Insurance has become our key revenue driver from the building close to 20%, our net revenue this quarter. And therefore, from starting from this quarter onwards, we’ll be disclosed sectors total gross premiums and revenue from our insurance brokerage business. In the first quarter this year, gross written premium reached RMB923.4 billion, representing a 15% increase year-over-year and a 31% decline from prior quarter. The quarter-over-quarter decline was mainly attributable to a decline in policy renewal, which impacted by timing of the first year finance. Revenue from first quarter business which RMB196.4 billion for the quarter, representing an increase of 27% year-over-year and remained stable from prior quarter. As a portion of our total gross written premium, under life insurance policy were both higher this quarter, thereby — a revenue take rate of broker business increased accordingly.

On the expense side, sales and marketing expense decreased to 40% to RMB106 million from the same period last year due to the optimization of our cost structure for our offline business and increase in portion of our revolving loan to existing customers. On the other hand, our general and service cost increased to 31% year-over-year to RMB200 million, mainly drive the increase of organization and service costs related to our insurance broker business. Quarter-over-quarter, our general and service expense as a percentage of revenue for the insurance sector has remained stable at 58%. G&A decreased by 21% year-over-year to RMB93 million. Allowance for contract assets and the receivables was RMB45 million for this quarter, remaining stable, and the profit grew 0.7% of loan facility.

And for our bottom line, we continue to deliver a strong profit of RMB425 million this quarter, increased 131% year-over-year and represent a net income margin of 53%, with net profit increased RMB390 million cash from operating in fourth quarter, an increase of 40% from prior quarter. Our total cash and cash equivalent was RMB5.1 billion at the end of the quarter compared to RMB4.3 billion as of the year-end of last year. With the gradual recovery of our macroeconomic, we will proactively seek our opportunity to allocate resources to new initiatives and the strategic investment, proper technology innovation and foster business growth. In the first quarter of 2023, we declared around $2.5 million to pay back our shares in the public market.

As of March 31, 2023, the Company has accumulated fund around close to $3 million for our share repurchase program. Based on our assessment of business and marketing conditions, our net total revenue in the second half quarter of this year is to be RMB0.9 billion to RMB1 billion with net profit margin expected to remain stable. Of course, this reflects our current and the preliminary view, which is subject to change and uncertainties. With that, we conclude our first remarks. Operator, we are now open for questions. Thank you.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from [Bruce Aurian] from New Haven Fund. Please go ahead.

Unidentified Analyst: First, I’d like to congratulate you on another outstanding quarter. I have two quick questions. Can you provide insight into whether the PRC government regards financial institutions like Yiren Digital favorably or unfavorably in the current political and economic climate? And my second question is, are you considering offering a dividend to shareholders?

Ning Tang: Thank you for your questions. Hello? Yes, no, please go ahead.

Na Mei: Okay. I think I can answer the second question. For the first question…

Ning Tang: Go ahead. Go ahead, please.

Na Mei: Okay. Okay. I will. Okay, thank you. I will answer the second question about our dividend [indiscernible]. Yes, you can see, we have purchased our share repurchase supply from the last December of last year. And by now, we have accumulated about $3 million to perform our share purchases. And by now, our management — well, for our cash deposits, we’re mostly focused on — more opportunity to use our cash deposits to serve our own business and hope our business to have a stable and growth — and we have growth and also want to increase our fund return ratio for now. So by now, I can say the Company has no dividend plan currently. And for this question, can tell me if any [indiscernible] to the question.

Ning Tang: Okay. Let me cover the first question. Thank you for your compliment, and we will continue to draw our back, first of all. And regarding macro conditions, is like you must know that the past several years, things have been quite a dynamic for this sector, a lot of changes. And — but now things have become much more stabilized. And the economy is recovering from the pandemic and really consumption is encouraged, small business is encouraged. And so, after the past few years of the dynamic period, we feel that recent macro environment is rather conducive to what we are doing.

Operator: [Operator Instructions] Your next question comes from [Matthew Larson] from [Fincadia]. Please go ahead.

Unidentified Analyst: Thanks for taking my call. And again, a terrific quarter. If I could give some advice to all to bring greater recognition of your company, you’re trading at essentially 1x earnings. If you make RMB0.70 a quarter, we can do the arithmetic, that’s RMB280 a year, and that’s less — that’s greater than what the stock is trading at, plus you have cash. I see your balance grew north of over $700 million. And that’s several times what your market cap is. So I’ve got a couple of questions. I mean, first of all, the news release should have said earnings up 100% versus just reporting the earnings. I mean, I catch the people’s eyes. And then you mentioned in your report an artificial intelligence initiative. If you would just say something like we’ve initiated an AI initiative and we expected to expand our business significantly.

I mean that alone would come up on people’s screens for U.S. investors as a rationale to invest in your company. And if they did — they computed the numbers and saw how undervalue you are versus your balance versus your book value and your cash balance, I think that could get it higher. I assume you want your stock to go higher. I mean, frankly, I worked at Morgan Stanley when you guys went public back in December 2015, when you were a peer-to-peer lender and you exited that area because the government did not — the PRC government frowned upon that, and you’ve done a great job doing so and you’re making plenty of money. So, I think you got to get to the word out there and being more detailed and frankly, a little more hyperbolic, a little more animated in your news releases, I think, would gain attention.