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360 DigiTech, Inc. (QFIN) Q1 2021 Earnings Call Transcript

QFIN Earnings Call - Final Transcript

360 DigiTech, Inc. (NASDAQ: QFIN) Q1 2021 earnings call dated May 27, 2021

Corporate Participants:

Mandy Dong — Investor Relations Director

Haisheng Wu — Chief Executive Officer and Director

Alex Xu — Chief Financial Officer and Director

Yan Zheng — Chief Risk Officer


Jacky Zuo — China Renaissance Securities — Analyst

Richard Xu — Morgan Stanley — Analyst

Yao Lee — CICC — Analyst

Steven Chan — Haitong International — Analyst



Ladies and gentlemen, thank you for standing by and welcome to the 360 DigiTech First Quarter 2021 Earnings Conference Call. Please also note, today’s event is being recorded.

At this time, I would like to turn the conference call over to Ms. Mandy Dong, IR Director. Please go ahead, Mandy.

Mandy Dong — Investor Relations Director

Thank you. Hello everyone, and welcome to our first quarter 2021 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; Mr. Zheng Yan, our CRO.

Before we begin the prepared remarks, I’d like to remind you of the company’s safe harbor statement. Except for historical information, the materials discussed may contain forward-looking statements based on current plans, estimates, and projections, therefore you should not place undue reliance on them. Forward-looking statements involve inherent risk and uncertainty. We caution that a number of important factors could cause actual results to differ materially. For information about potential risks and uncertainties, please refer to the company’s SEC Filings. Also this call includes discussion 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 figures mentioned are in RMB.

I will now turn the call over to Mr. Wu Haisheng, CEO of our company.

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] Hello everyone. I am very happy to report that our quarter therefore exceeded our expectations across the board. The strong growth momentum that we have seen since 2020 Q2 continued in the first quarter and we had another set of a record-breaking operational results.

During the quarter, total loan facilitation was RMB74.1 billion, up 40% year-over-year. Outstanding loan balance increased by 38% year-over-year to RMB101.9 billion, exceeding RMB100 billion for the first time. Total revenue was RMB3.6 billion, up 13% year-over-year. Non-GAAP net income was RMB1.4 billion, up 452% year-over-year. As we execute on our various strategic initiatives and overall market demand continues to recover, we expect to maintain this robust growth momentum in 2021.

[Foreign Speech] While maintaining strong growth, we made significant progress in our technology-driven strategy of upgrading and transition. Loan facilitation under the cap-light model and other tech solution models exceeded 50% of total for the first time. This ratio increased further to 55% in recent months. This marks a fundamental change to the nature of our business. In addition, our tech empowered business line advanced on multiple fronts. Our smart marketing service product, Intelligence Credit Engine, ICE delivered rapid growth. In April, key monthly operating metrics of ICE such as users with approved credit line, transaction volume, and outstanding balance doubled from the 2020 year-end levels. In particular, the transaction volume in April went up by an impressive 200% from the 2020 year-end levels. Moreover, our risk management, our SaaS [Phonetic] product expanded rapidly. We have now established collaboration with 29 financial institutions under this model and with another nine in the pipeline.

[Foreign Speech] In terms of strategic growth drivers, we are very pleased to report remarkable progress in key initiatives such as embedded finance, API model, SME finance and the collaboration with Kincheng Bank of Tianjin, in-short, KCB. We believe we have successfully upgraded our core growth engines with more comprehensive and a diversified operations.

[Foreign Speech] Our embedded finance API model remains very popular among our business targets and connected with more chassis platform during the quarter. So far, we have established partnership with 20 leading traffic platforms and further diversified our customer acquisition channels. As of now, embedded finance model has already contributed over 35% of our new customer acquisition. V-pocket, our digital credit card products added around 1.14 million new merchants during the quarter with over RMB1.5 billion monthly transaction volume. This product continues to lift overall engagement level and the thickness of our customer base.

[Foreign Speech] We launched our SME finance business last year and the segment delivered a significant growth in Q1. Leveraging our risk management RM expertise in consumer finance, we will balance our unique owner + SME pure core IM model. Under this model, SME is evaluated both [Indecipherable] business enterprise. This substantially improved our risk management capability and the efficiency in SME lending. Most of our SME borrowers are engaged in retail, wholesale, hotel, F&B food and beverage and manufacturing.

In the first quarter, the total amount of new approved credit line in SME segment increased 67% on a sequential basis. In addition, our online and offline borrower acquisition channels expanded rapidly. So far, we have established a collaboration with 28 leading partners. [Indecipherable] SME platforms with the broadest channel coverage and our SME loan product quickly became one of the favorites among partners. Pricing of SME product is generally below 24% with better risk performance, longer tenure and the larger ticket size than consumer loans, which result in higher take rates around roughly 8%. With huge market potential, more supportive regulatory environment and attractive economic return, we believe SME presents a very promising opportunity for our long-term growth.

[Foreign Speech] Our collaboration with KCB centrally kicked off in the first quarter. Our deep-rooted strategic relationship has translated into strong business result. Within just a few months, total accumulated loan facilitation volume from KCB reached around RMB18 billion with a loan balance at around RMB13 billion. KCB now has become our largest partner in terms of volume, yet our strong strategic partnership is more than just the scale of the business. More importantly, this strategic partnership has boosted operational efficiency for both parties and in turn, such as showcase and help us to improve efficiency when we work with other financial institutions. We have seen positive demonstration effect that have led to notable improvements in our overall efficiency.

[Foreign Speech] We continued to improve funding efficiency and optimize asset quality. Our overall funding cost has been on a gradual downward trend over the last few quarters as we build more diversified funding sources. So far this year, we have issued a total of RMB2.1 billion ABS, ranking number four in the market with an average coupon rate of 5.6%. Key leading indicators of asset quality further improved and reached a new set of best record in our history. At this point, M1 collection rate increased to over 91% and day one delinquency rate dropped further to 4.9%, the best ever.

[Foreign Speech] Last, let me share as few thoughts regarding current regulatory environment that the guideline of the commercial banks’ online lending practice issued by CBIRC in July 2020 provided a basic regulatory framework for loan facilitation business, it has set some very specific practice examples of the loan facilitation model, we have always conducted our business in strict compliance with this framework. That is one of the reasons why our loan facilitation model is well accepted by almost 100 financial institution partners. We have a leader exposure in joint lending and student lending and stick to our role as a tech empowered loan facilitator. We also make sure we do not issue ABS over the leverage limit.

As you may know, we were among the 13 major FinTech Internet platforms that the regulator invited to meet recently. At the meeting, the regulator acknowledged the importance of our role in improving the efficiency of financial service providing service to our demand and reducing transaction cost. We believe the meeting was a necessary step to apply fill in the balance of the regulatory supervision to market participants and promote the healthy development of the platform economy. Strengthening supervision of the leading players will increase clarity to the regulatory direction of the industry, reduce regulatory overhead and promote a healthy and more consolidated market space.

Compared to the other fintech company ad meeting, our business models are relatively simple and straightforward. We have consistently held our operations to the highest compliance standards. Therefore, we are very confident we can meet new regulatory requirements applied to this industry. As the regulatory framework becomes more clear, we believe that leading fintech platforms like ourselves will embrace a historical era of growth.

[Foreign Speech] Overall, we are very excited that we are off to a very strong start in 2021. For the first time, loan balance topped over RMB100 billion and the capital-light model contributed more than half of our loan book. Our standard initiative delivered faster than expected results and there is more regulatory clarity about leading fintech platform. All of these give us full confidence for our development in 2021 and beyond.

[Foreign Speech] Now let me turn it over to our CFO, Alex to run through more detail info.

Alex Xu — Chief Financial Officer and Director

Okay. Thank you, Haisheng. Good morning and good evening everyone. Welcome to our quarterly earnings call. For the interest of time, I will not go over all the financial line items on the call. Please refer to our earnings release for the details.

As Haisheng mentioned, we had experienced robust consumers’ demand for credit along with further improvement in asset quality in Q1, as the Chinese economy continued on a steady upward trend and the Chinese New Year related seasonality was muted than normal.

Total net revenue for Q1 was RMB3.6 billion versus RMB3.34 billion in Q4 and RMB3.18 billion a year ago. Revenue from Credit Driven Services, capital heavy was RMB2.45 billion compared to RMB2.56 billion in Q4 and RMB2.81 billion a year ago. The sequential and year-on-year decline was in part due to the facilitation volume mix change as cap heavy contribution decreased significantly, although a recovery in average pricing offset some of the negative impact on a sequential basis.

During the quarter, average pricing was about 26.6% compared to 25.3% in Q4 and 28.2% a year ago. Going forward, we are expecting a relatively stable pricing environment throughout 2021. Revenue from platform service capital-light was RMB1.15 billion compared to RMB718 million in Q4 and RMB373 million a year ago. The robust growth was mainly driven by a 58% sequential growth in facilitation volume from cap-light and other technology solutions. While the underlying take rate for the platform service were relatively stable, we expect cap-light contribution percentage to continue to increase throughout 2021 and eventually account for a clear majority of our total volume by the year-end.

As macro-economic activities continued to recover in China, demand for Internet traffic also increased significantly along the way. As a result, we have experienced some uptick in sales and marketing expenses, average customer acquisition cost per user with approved credit line was RMB217 in Q1 compared to RMB198 in Q4. Meanwhile, we also noticed a clear pickup in customers’ drawdown activity during the quarter. As a result, we were able to maintain a stable and satisfied ROI despite increases in customer acquisition costs. We will continue to use lifecycle ROI as a key metric to determine the pace and scope of our customer acquisition strategy. For 2021, at this point in time, we believe current market conditions support a more proactive approach to accelerate the growth of our business.

Non-GAAP net income was RMB1.41 billion in Q1 versus RMB1.31 billion in Q4 and RMB255 million a year ago. We once again set a new record in quarterly profitability, driven by higher facilitation volume and noticeable improvement in asset quality. As we previously communicated to the market, with the transition to a more technology driven business model, the structure of our financial model has gradually changed. For Q1, we have seen significant improvement in operating margins as increasing contribution from cap-light and other technology solutions will generally lead to higher margin structure. We continue to expect the overall profitability growth to be more or less keep pace with the facilitation volume growth for 2021.

With strong operating results and increased contribution from capital-light model in Q1, our leverage ratio, which is defined as a risk bearing loan balance divided by shareholders’ equity further declined to 5.4 times from 6.6 times in Q4 and 9.5 times a year ago. We expect to see continued deleveraging in our business, driven by accelerating movement towards capital-light model and solid operating results. Meanwhile, our provision coverage ratio reached 554% in Q1 compared to 470% in Q4 and 401% a year ago. This was the highest provision coverage ratio in our corporate history, reflecting significant improvement in asset quality and our conservative approach in estimating provisions. However, as capital-light become a clear majority of our operations in the future and we are deeply in the safe zone in terms of the provision coverage, we believe these metrics become less relevant to reflect the nature of our business in the future.

Total cash and the cash equivalents increased to RMB9.2 billion in Q1 from RMB7.7 billion in Q4. Non-restricted cash was approximately RMB6 billion in Q1 versus RMB4.4 billion in Q4. A significant portion of our cash was allocated to security deposit with our institutional partners and registered capitals of different entities to support our daily operations. While we continue to generate strong cash flow through operation, we will also proactively deploy cash to expand our business, invest in key technologies and satisfied potential regulatory requirements. We believe that sufficient cash position will not only enable us to compete in this ever changing market, but also position us to capture potential growth opportunities in the market recovery.

Finally, let me give you some update about our outlook for 2021. While overall business trend has been stronger than we expected so far this year, we intend to keep our tradition of conservative approach in providing forward guidance. As such, for now we would like to maintain our 2021 total volume guidance of between RMB310 billion to RMB330 billion, representing year-on-year growth of 26% to 34%. Meanwhile, we expect total facilitation volume for Q2 should be in the range of RMB85 billion to RMB87 billion, representing 15% to 17% sequential growth. We will reevaluate full year guidance when we report our Q2 results. As always, this forecast reflects the Company’s current and the preliminary views which is subject to material changes.

With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

Questions and Answers:


Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. Our first question is Jacky Zuo from China Renaissance. Please go ahead.

Jacky Zuo — China Renaissance Securities — Analyst

[Foreign Speech] So thanks for taking my questions and congrats for the strong results. I have two questions. Number one is about our SME loan products. I saw we had very strong Q growth in our SME financing. So just want to understand what is the APR loan size unique economics about this SME financing products? And what is our loan volume target for SME this year? And I think Mr. Wu, also our CEO mentioned that the take rate is now about 8%. So how compare 58% with our overall loan take rates.

And secondly is about our tech exports business which is the ICE. So just want to understand what is the difference between ICE and our other capital-light [Indecipherable] products, what is the take rates and what are the bank partners for these products? So I observed that our reported loan volume definition change this quarter I think, start to include this ICE loan volume. So just want to check what is the ICE loan volume for this quarter and last quarter? Thank you.

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] Sure. Jacky, let me handle your first question. Well, you’re absolutely right. We see a significant growth in our SME business in the first quarter. As you know there are two — actually two types of SME product in the market. The first type actually we view is more related to consumer finance product. Most of — a lot of peers they extended the existing consumer finance product to anyone — to their own — who are the management or the owner of SME. This actually has some quite similar unit economy with consumer finance products. This is not we are pursuing. The second type is actually what we are pursuing now, is more — actually more directly related to SME enterprise itself. We focus on the operational metrics of SME companies. By doing this, risk management of SME products will leverage our existing expertise in consumer finance, uniquely developed the dual core risk management model. That means, we evaluate this SME owner both as owner itself also as a SME enterprise. This shows much better unit economy than the general consumer products.

[Foreign Speech] Sure. As we focus on the second half, we see some more directly related who are the truly SME loan because it has larger market potential and the better unit economy returns. The average APR of this product is 20% is for those more related to the tax-related SME loan or the invoice-related, average APR is around 16%. Ticket size of SME loan is RMB210,000. As we mentioned in the prepared remarks, the take rate is around 8% which is almost twice — double the size of the consumer finance loans.

[Foreign Speech] For your second question about the ICE products, as you can see full name is Intelligence Credit Engine products, it’s focused more on the smarter marketing service. As you see, we have accumulated around a 100 financial institutions due to the very long-term cooperation with them, we know their preference and their therapy very well as we divided them into different layers according to their capability of risk management. For those who have the intention to improve their risk management probability or they already have very strong risk management capability, we will deliver ICE product to them, which just focused on the customer acquisition service. Therefore as we compare it to capital-light model, the ICE model just provided the customer acquisition service, the take rate is comparatively lower.

[Foreign Speech] As we covered various that type of financial institutions like consumer finance, corporate banks, etc, there are not much difference among the loan assets allocated to them. As we mentioned in the remarks, last quarter this program of ICE reached RMB2.4 billion compared with [Indecipherable] sites from last quarter.

Jacky Zuo — China Renaissance Securities — Analyst

[Foreign Speech] Thank you.


Thank you, Jacky. Next question is Richard Xu from Morgan Stanley. Please go ahead.

Richard Xu — Morgan Stanley — Analyst

[Foreign Speech] Basically two few questions. One is [Technical Issues] between ICE product and other product, certainly take rate is different. So, what will be the long-term strategic thinking on the loan allocations? Thank you.

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] Sure. Richard, let me address your funding question. First of all, the diversification of the funding source is always the goal we’re pursuing and we will keep that. Secondly, for KCB, as you know we have prudent relationship with KCB, it’s better that KCB as a showcase and to demonstrate to other financial institutions. In addition, as you see we carry out a lot strategy initiative this year, it’s easier for us to explore the new products with KCB collaboration.

[Foreign Speech] Yes. Due to our deep-rooted relationship with KCB, there might be short-term difference compared to the take rate when we cooperate with other financial institutions, but it will take a longer term view, we will definitely work with all the partners in sale business term.

[Foreign Speech] The fundamental reason is our loan product is very competitive in the market. Even there are short-term difference between the KCB business terms with other financial institution business terms, KCB can be at the showcase and in the long-term other financial institutions will catch-up with equal terms.

[Foreign Speech] As we always spend no effort becoming the top clearing team that covered every process or every function of the whole business operations. Therefore, for your question how we allocate different assets or products among these 100 financial institutions, actually we look at business needs from the funding partners. For example, if the funding partner, they need our comprehensive product then we provide capital-light products. If the funding partner they are very strong in risk management, then we only provide a smart marketing product. If they already have very strong source of customers, then we provide a RM SaaS product to them. All-in-all, we provide a service based on the business needs of our funding partners.

[Foreign Speech] Thank you, Richard, hope I got your point.


Thank you, Richard. Next question is Yao Lee from CICC. Please go ahead.

Yao Lee — CICC — Analyst

[Foreign Speech] Okay, then I’ll translate my question. Hello management, thanks for taking my question and congrats to our solid results. So, today I had two great questions and the first one is regarding our strategic partnership with KCB. So I will notice that the KCB has become the largest institution partner in terms of the loan facilitation volume. So could you please share with us more information on how much contribution actually comes from the KCB in terms of the loan origination in 1Q 2021?

And the second question is about our progress on the SME loan business. So given our SME loan business has been way on track, so could you please elaborate more on how much contribution comes from the SME loan in terms of the loan origination in 1Q 2021? And how much contribution it will be by the end of this year? Thanks so much.

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] Yes, you’re right. As you can see in terms of business volume, KCB already become our largest partner. As mentioned in the prepared remarks, in Q1 JMV [Phonetic] cooperated with KCB totaled RMB18 billion with loan balance RMB13.3 billion. As we further advanced our business initiative with KCB, we expect to see this number going up in the following [Technical Issues]

[Foreign Speech] Second question about SME loan, as we mentioned that there are two definitions about the SME. For the broader definition that is consumer finance loan related to SME management. In the last quarter, this product contributed around 30% to 40% and we expect to see this number rising up to around 60% to 80% at year-end. For the second more strict definition of SME that is definitely the goal we are pursuing that is more related to the SME enterprise itself. We target to reach RMB10 billion loan balance at year-end, if you recall our guidance of total volume is RMB310 billion to RMB330 billion at year-end, roughly you can get the contribution ratio.

[Foreign Speech] Let me add more color about SME. Although it’s very early stage of this product, we are trying multiple directions to further develop this product. For example, with very premium SME enterprise borrower, we may — or granting around RMB1 million ticket size product and we expect to hear more when we see more results coming out.

Alex Xu — Chief Financial Officer and Director

Sorry. Alex [Speech Overlap] CFO, I’ll probably add a couple of details to your questions. First of all, regarding the KCB’s volume, as Haisheng mentioned, up to the month of April, the accumulated volume from KCB is about RMB18 billion. But I guess your question is about Q1, for Q1, KCB’s volume is roughly RMB10.8 billion, roughly speaking. So you can use that RMB10.8 billion to calculate the percentage ratio there.

And then regarding the SME there, because as Haisheng mentioned, there’s two definitions. One is more narrowly defined, the other one is more kind of a broad definition. We use the most sort of a restrictive definition for SME, meaning for those enterprises with the loans issued to the enterprise, with actual operation, with sales receipt, with taxation information, those kinds of things. That’s the narrowest definition for SME. For that, the total sort of loan volume up to April, it’s already at — that is RMB5.8 billion. Sorry, it’s not April 2, the first quarter is RMB5.8 billion. The loan balance for this restricted definition is roughly RMB7.5 billion at the end of the first quarter. Keep in mind this sort of narrowly defined SME loans typically has a much longer duration than the consumer loans, which will result in a pretty fast buildup of the balance as time goes. That’s my — sort of added a couple points there. Thank you.


Thank you, Yao Lee. Next question is Steven from Haitong International. Please go ahead.

Steven Chan — Haitong International — Analyst

[Foreign Speech] I’ll translate it. Two questions one is about follow-up question on the SME loan facilitation business. I would like to understand the sale of secured — the sale — SME loans with collateral or secure SME loans and unsecured SME loan so far up to maybe April? And how do you compare the asset quality of SME loans relative to the consumer finance loans we have done in say different asset quality indicators? That’s the first question.

And second question is, could you just tell us why we have a rise in customer acquisition costs in Q1 on a Q-o-Q basis and what will be our outlook on the trend of customer acquisition cost for the rest of 2021? Thanks.

Yan Zheng — Chief Risk Officer

[Foreign Speech] So in fact, our SME customer is lower than the overall market, about 70% to 80% of overall levels and we use the door for managing — to control the SME product which means that the enterprise class business owner and the use of the [Indecipherable] product otherwise we will operate more owners that individual customers, but this is obviously a difference between individuals and small business.

Haisheng Wu — Chief Executive Officer and Director

[Foreign Speech] As we show it market before that, when we actually conduct our real operations, it’s not as easy because the way we are looking at, if the ROI, return on investment of customers we look at. As for in the first quarter, we believe we successfully conducted the better customer acquisition strategy is demonstrated by higher customer approval rate and larger ticket size which in turn improved the ROI.

[Foreign Speech] As we expand the SME business, if we purely look at CAC metrics, since they have the larger ticket size, longer tenure and the lower APR. On the safety level, it will push up this number. However, in actually business operation, we believe expanding SME is much better business decision for us as asset quality is better and higher ROI and better unit in our economy.

Steven Chan — Haitong International — Analyst


Alex Xu — Chief Financial Officer and Director

Steven, this is Alex. I just want to add one follow-up point from Haisheng’s point. As Haisheng mentioned that as we expand into the SME, one nature of the SME business is that large ticket size, longer duration loans, which also associated with a much higher per ticket customer acquisition cost, okay. And so that — because we are kind of a growing SME business in Q1 more, I guess proactively, that mix change also result in a little bit higher, kind of, per credit line customer acquisition cost as we put it. So if you sort of get rid of the SME portion, just look at the consumer portion, the change was not as high as the — were reported number. So, just one add-up to the point. Thank you.

Steven Chan — Haitong International — Analyst

[Foreign Speech]


Thank you, Steven. Due to time constrains, I will now hand the session back to management for closing debrief. Please go ahead.

Alex Xu — Chief Financial Officer and Director

Okay. Thank you, everyone, for joining us for the conference call. If you have additional questions, please feel free to contact us. And that’s it for the call. Thank you.


[Operator Closing Remarks]


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