Yiren Digital Ltd. (NYSE:YRD) Q2 2023 Earnings Call Transcript

Yiren Digital Ltd. (NYSE:YRD) Q2 2023 Earnings Call Transcript August 18, 2023

Operator: Thank you for standing by, and welcome to the Yiren Digital Second 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] today’s conference call is being recorded. I would now like to turn the conference over to Lydia Yu of Investor Relations. Please go ahead, ma’am.

Lydia Yu: Thanks. Hello, everyone, and welcome to our Second Quarter 2023 Earnings Conference Call. Today’s call features prepared remarks by the Founder, Chairman and CEO of CreditEase and our CEO, Ning Tang and our CFO, Ms. Na Mei. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provision of 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 future risks, uncertainties or factors is included in our filings with the U.S. SEC. We do not undertake any obligation to update any forward-looking statements as required under development laws.

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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 U.S. GAAP. For information about these non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it on to Ning, our CEO, for opening remarks.

Ning Tang: Thank you all for joining our earnings conference call today. Before I jump into business updates for the quarter, I would like to first review our new corporate positioning and AI and technology-driven financial and lifestyle services platform. Our new positioning better aligns with our business model that is anchored by three key pillars; financial services, insurance, and consumption and lifestyle services with underlying business strategies and operational flows driven by AI technologies. The company’s AI lab, which was officially established last quarter, we’ll focus on utilizing large language models and the generative AI technologies, to build and develop new products and applications that will work across our business lines.

A few examples of what we are working on include a customized virtual AI customer service agent that will be available to respond to customer inquiries, 24/7 as well as AI-assisted marketing tools and AI productivity tools to enhance our productivity. I will continue to share more details and progress about AI during future earnings conference call. Next, an update first on our insurance brokerage business. Total gross premiums reached more than RMB 1.3 billion, in the Second Quarter of 2023, up 67% year-over-year, of which life insurance policies increased 162% year-over-year. The spike in life insurance policy sales this quarter was mainly driven by the timing of the new regulation that requires life insurance companies to lower their pricing interest rate of newly developed products from 3.5% to 3% and to discontinue selling all products above 3% interest rate.

As we continue to invest in product innovation and customization and agent development and digitization, we noted three key successes this quarter, average first year premiums increased 15% quarter-over-quarter. The number of life insurance policy premiums exceeding RMB 3 million increased 206% quarter-over-quarter. And average productivity of our agents grew by 328%. On property insurance, as mentioned on our last call, reinsurance for overseas construction policies is a new key market we are focusing on and the total premium for this product segment continue to grow at a fast pace, increasing 77% quarter-over-quarter. Next, on Financial Services. In the Second Quarter of 2023, total loan volume was RMB 8.2 billion, representing a 65% increase year-over-year.

The total number of borrowers in the quarter increased 82% from prior year to 1.01 million on Yi Xiang Hua, which continues to be our fastest-growing loan product, monthly active user number on our Yi Xiang Hua APP continues to increase 11% from prior quarter to RMB 2.4 million and the number of average transactions per user increased to 3.2x this quarter, up from 2.1x from the Second Quarter of 2022, indicating a significant increase in LTV over tech, ratio per borrower. Last quarter, I mentioned that we have started expanding internationally in which we hope to leverage our expertise in the consumer finance sector to promote greater financial inclusion worldwide. We launched in the Philippines last quarter under the brand Easy Peso and have seen rapid growth things.

As our team continued to enhance local operational flows and refine our risk models, we have seen a continued improvement in margins. With initial success achieved in the Philippines, we have also started evaluating other regions and expect to expand to one to two new countries in the near future. On the funding cost front, as we continue to diversify our funding sources we noted a 7% decrease in institutional funding costs in June as compared to beginning of the year. On asset quality, delinquencies remained stable with 15 to 89 days delinquency rate at 2.9% compared to 3.0% last quarter. On consumption and lifestyle services, total GMV generated this quarter increased 28% from prior quarter to RMB 396 million. The total number of paying members this quarter increased 57% from prior quarter to 2.44 million.

To conclude, I want to say that I’m really proud of our team for everything we’ve accomplished. So far, it’s been a challenging few years but I’m quite optimistic about the road ahead and grateful to you all for being on this journey with us. With that, I’ll now pass it to Na, who will go through the financials for this quarter.

Na Mei: Hello, everyone. On this call, I will only focus on our key financial highlights. Please refer to our earnings release, and IR deck for further details. In the Second Quarter of this year, total revenue reached RMB 1.3 billion representing 55% increase year-over-year and a 34% increase from prior quarter, showing strong financial performance despite a sequence more challenged macroeconomics this quarter. On financial services, we continue to see strong demand for our [indiscernible] products with total loan facility this quarter reached 8.2 billion, representing 27% growth over prior quarter as compared to analysis projection of industrial average of single-digit growth. Our insurance gross written premiums reached RMB 1.3 billion, representing a 57% increase year-over-year and a 54% increase from prior quarter, probably driven by strong life insurance policy sales.

Revenue for insurance brokerage reached RMB 404.7 million for the quarter, increased 115% year-over-year and representing 31% of total net revenue. On succession on the Yiren Select service, total GMV for the quarter reached RMB 396 billion, increased 28% from prior quarter. On the other side, sales and marketing expense increased 40% to RMB 149 million from last quarter, mainly due to our startup investment in brand and marketing this quarter to drive our further growth. Origination, servicing and other operating costs increased to 73% from prior quarter RMB 346 million, medium dry by increase on general and sales costs relating to our insurance worker sector. However, our counter [indiscernible] service expense as a percentage of revenue for the insurance sector has remained relatively stable at around [17%].

General and administrative expenses by minus 5% quarter-over-quarter for RMB 97 million. Allowance for contract and receivables was RMB 51 million for this quarter, remaining stable and [indiscernible] 0.7% of our total loan facility. Until our bottom line, we continue to deliver a strong profit of RMB 427 million this quarter, increased 24% quarter-over-quarter. We generally [indiscernible] RMB 780 million net cash from operating this quarter, an increase of 84% from prior quarter. Total tax and cash equivalent was RMB 5.8 billion by the end of this quarter. Early in June, we announced the acquisition of licensed financial guarantee company in China which will enable us to provide the financial guarantee company and continue to entire our credit business segment as well as other business models.

Going forward, we will continue to seek out opportunities for new initiatives and strategic investment to foster business growth. Generally, we remain confident in our company’s business fundamental and the growth opportunity. Therefore, we continue to execute our share repurchase program. This quarter, we have deployed close to USD 1 million to pay back our shares in the company market. As of June 30, 2023, the company has accumulated [indiscernible] around close to USD 3.5 million for our payback. Based on [indiscernible] preliminary assign of business and the market conditions, the company projects a total revenue in the Third Quarter of this year to be between RMB 0.9 billion to RMB 1.1 billion with net profit margin tended to remain stable.

With that, we conclude our closing remarks. Operator, we’ll now open up for questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Andrew Lean, Private investor.

Unidentified Analyst: My question is the [indiscernible] is 50% owner of the company. I guess you want the stock price to increase and currently, the volume is — I just calculated it and it’s very low. Buybacks, they are very hard to do with this volume. Would you consider a dividend as [indiscernible] did a dividend? Also, it will legitimize the company that it is official. Another question. The second question would be about your auditing. If you could go ahead and talk about the legitimacy of your numbers and the fact that it took 3 auditors and more than 1 year to get the latest financial statement audited. The company looks amazing on paper. It has like $800 million in cash, and $200 million in market cap currently. So I’m very curious about the legitimacy of the numbers and why that happens.

Ning Tang: Yes. Na will comment on the auditing question. And I will answer the first question. We have no intention to delist the company because being a global leading impact company is our strategic objective. We believe digital is our flagship for that strategic initiative. And current geopolitical challenges, as well as what you may well know, about the past few years — not so stable market conditions, regarding fintech, collectively have cost trouble in terms of valuation, not only for us but also for other players in the sector. What we’ve been doing is to work very hard on business fundamentals and also to do a better job at communicating with the market regarding our strategy and operations. And you may remember that a few years back, we were a clear leader in the market.

And we are hoping, and we are also confident with hard and smart work. We will regain our market leadership position. And also, we have a relatively large price position that can help us invest into the future, including things like AI and global expansion. As I mentioned, we are expanding to other markets which is a very promising direction. In my view, AI will be very significant in my view. And my hope is that in 3 years’ time, the company will be transformed into a new global impact leader.

Unidentified Analyst: But again, could you comment on the dividend policy? Like if you could do a dividend policy,[indiscernible] Tech, it grew recently in stock price and in volumes. They’re also owned by the CEO of 50%. I would like Mr. Ning Tang, if you could comment on the possible dividend.

Ning Tang: Yes. Yes, I’ve been speaking, yes. And this is me and we have currently no such dividend policy. Yes, we keep evaluating different possibilities, different strategies. But currently, our view is that, yes, this strong cash position can help us, yes, stand off any potential uncertain challenges and also investing for the future.

Unidentified Analyst: Okay. But if you want your stock price to increase, couldn’t you consider like the discount to value is very high, buybacks are out of question. Also another idea would be X Financial XYF. They bought back shares, they repurchase shares directly from employees that have stocked. Maybe you could consider that in increasing the daily trading volume in order to move the needle of the stock price and also the volume? So buying from employees, could you consider that?

Ning Tang: To be honest, we are also disappointed that we haven’t been able to really deliver value regarding share price. That’s why I just said that we will try and do a much better job communicating with the market, yes, stakeholders. But regarding employee shares, I believe our team members love to enjoy upside with the company, and they also deserve it. So I very much want them to enjoy the upside as suppose to buying shares from them after this low valuation.

Unidentified Analyst: Okay. Consider again, the dividend policy introduction, maybe for next quarters. And consider [indiscernible] which did this dividend policy and had a 3x 4x stock price increase and volume entered the company, it’s much more healthy right now because they made a big dividend of 30% dividend yield in 6 months. So they’re paying like 6% now and 6% later in 6 months, or they paid 6% already. [indiscernible] similar to YRD in my opinion.

Ning Tang: Thank you for your suggestion.

Lydia Yu: This is Lydia, Investor Relations. On your second question, can I quickly clarify with you first. Your question is on auditing. Because I know that we released our annual report this year in April, which is actually on par with [indiscernible]. So I just wanted to clarify on what you’re asking on our update.

Unidentified Analyst: Then that was resolved. It was just the change from KPMG.

Lydia Yu: Financial report later just because there was no auditor. So it took some time for the new auditors to get out of side with — on a number. But for our 2022 annual report, it was released on April 28 this year.

Operator: [Operator Instructions] The next question comes from Matthew Larson with National Securities Corporation.

Matthew Larson: Hello. A couple of things. On the subject of the buybacks, I got cut off and had to call back. So maybe you mentioned it, you are scheduled to buy back $20 million worth of stock this year. Your volume constrained to a certain degree. But the volume over the last 2 months has averaged considerably higher than the first 6 months this year. What are the restrictions as far as you have when it comes to the amount of shares you can buy back on a daily or weekly basis with percentage?

Ning Tang: Can Na please answer that question regarding buybacks.

Na Mei: Yes, I will answer this question. As you mentioned, we put forward our payback we have to follow up the restriction on our shares provide amount. Basically, the limited restriction that the payback amount the company implant is normal than the 50% of the average Sandvik liquidity amount. So we have much — you comply with the rule about the [indiscernible] to 20% of the total marketing value.