FinVolution : Second Quarter 2023 Earnings Conference Call Transcript

[FINV] - FinVolution Group

Q2 2023 Earnings Conference Call

August 28, 2023, 8:30PM ET.

Officers

Tiezheng Li, Chief Executive Officer

Jiayuan Xu, Chief Financial Officer

Jimmy Tan, Head, IR

Analysts

Yada Li, CICC

Frank Zheng, Credit Suisse

Alex Ye, UBS

Thomas Chong, Jefferies

Cindy Wang, China Renaissance

Presentation

Operator: Hello, ladies and gentlemen. Thank you for participating in the Second Quarter 2023 Earnings Conference Call for FinVolution Group. (Operator Instructions). After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded.

I'll now turn the call over to your host, Jimmy Tan, Head of Investor Relations for the Company. Jimmy, please go ahead.

Jimmy Tan: Hello, everyone, and welcome to our second quarter 2023 earnings conference call. The Company 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 ir.finvgroup.com.

Mr. Tiezheng Li, 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. Tiezheng Li. Please go ahead, sir.

Tiezheng Li: Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. This is Tiezheng Li, CEO of FinVolution Group. We're happy to speak with you today.

Since our expansion into the Indonesian market back in 2018, we have continued to execute our Local Focus, Global Outlook strategy in the Pan-Asia region with unwavering determination. To date, we have cumulatively served over 28 million borrowers in China, Indonesia, and the Philippines.

By integrating our local business focus with an international perspective, we are able to leverage our expertise and insights derived from diverse markets to drive growth and foster innovation within our organization. We expect this strategy to produce further benefits as we expand into additional countries and strengthen our presence in our existing markets.

As China transitions into the post-Covid era, the recent July macroeconomic data continued to be challenging with pockets of improvement in certain areas. However, macroeconomic data from the ASEAN markets in which we operate currently paints a more positive picture, reflecting growth across different operational metrics. Given these circumstances, we are adopting a strategy of progressive growth in the China market while pursuing rapid growth in the international markets.

While we await the domestic macro environment's recovery from the current challenges, we have been continuously investing in R&D. We have substantially enhanced our technologies enabling us to streamline our processes, upgrade our customer experience and achieve improvements across the various markets in which we operate.

We are pleased to share that FinVolution's total transaction volume in the second quarter increased to RMB47.3 billion, while our outstanding loan balance reached RMB63.7 billion, up 14% and 13%, respectively, year-over-year. This growth validates our company's ability to efficiently adapt to the changing economic landscape while continuing to meet the needs of our customers across our markets in the Pan-Asian region.

Technological innovation continues to be the core of our mission and the primary source of our competitive advantage. In July, we hosted the eighth FinVolution Technology Cup

Competition, our annual event showcasing and cultivating technological talent and creativity. This year's event focused on the development of automatic speech recognition, ASR, to improve the technology's grasp of Chinese dialects and languages, aiming to increase chatbots' efficiency and accuracy when communicating with customers from different regions.

Our commitment to innovation was recently recognized at the 2023 World Artificial Intelligence Conference, where the thesis we developed in cooperation with University of Zhejiang, Drop Message: Unifying Random Dropping for Graph Neural Networks was nominated for the Outstanding Thesis award.

Our investment in A.I and Machine Learning began years ago, with R&D spanning across different product categories such as self-help services, chatbots, data analytics and credit risk assessment. Over the past several years, we have been training our models utilizing billions of dollars of transaction data, steadily increasing their accuracy. We currently employ a fully automated loan approval process with all our funding partners, and our automated chatbot resolves about 80% of customer inquiries on average.

We consistently embrace new technologies and deploy them into our daily operations to deliver a more personalized and tailored experience for our users. Along with the use of chatbots in customer service and to address early-days delinquencies in the loan collection process, we have also upgraded and streamlined user experience by automating self- help functions and providing instant responses for our users.

In addition, we have incorporated AIGC into our advertisements for our overseas business, increasing our campaigns' audience targeting accuracy and achieving greater visibility on leading social media platforms such as Facebook, Instagram, and Tik Tok. As a result, during the month of July, our followers on Tik Tok grew to around 700,000, while followers on Facebook and Instagram reached 967,000 and 220,000 respectively.

Furthermore, we strove to advance our commitment to promoting financial inclusion during the quarter. Aligning our ESG efforts with this business goal through better borrowing rates, we further optimized our average borrowing rates in China to 22.3%, ensuring our services are accessible and affordable for our borrowers.

On a related note, I would like to share some updates on our ESG progress. We recently published our 2022 ESG report, the fifth in our Company's history, demonstrating our dedication to transparency and sustainability. Responsible ESG reporting allows us to showcase our strong governance practices and our actions addressing the environmental and social issues affecting our industry, while also empowering us to design effective future initiatives.

For instance, since the launch of our interest-free loans for eligible small business owners in China, we have cumulatively supported over 11,000 small business owners in pursuit of their dreams. Our subsidiaries in the Indonesian and Philippine markets are also proactively engaging in ESG work, such as conducting cost management workshops to educate borrowers and launching a large-scale mangrove tree planting project to improve

people's livelihoods in the local community, among other activities. We firmly believe that aligning our ESG and business goals will ultimately create long-term value for all our stakeholders while achieving a positive societal impact.

Before we move on to additional operational and financial metrics with our CFO, I'd like to share that FinVolution celebrated its 16th Anniversary during the second quarter, a milestone that affords us a glimpse of our future outlook as an enterprise with sustainable growth. As we have grown and built the business throughout the years, we have accumulated a suite of technologies, skillsets, and capabilities that enable us to navigate and succeed in all the markets in which we operate.

We will remain committed to our vision of leveraging innovative technology to make financial services better, propelling FinVolution's long-term sustainable growth along the way.

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

Jiayuan Xu: Thank you, Li, and hello, everyone. Welcome to our second quarter 2023 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 Li mentioned, the domestic macro environment continued to be challenging with pockets of improvements in certain areas. The official manufacturing purchasing managers' index came in at 49.3 points in July compared to 49 points in June and 48.8 points in May, according to data released by the National Bureau of Statistics on July 31, 2023.

Meanwhile, total social financing data in July increased by just RMB528 billion, below market expectations. Total retail consumption in July only increased by 2.5% compared with the same period last year. However, despite the challenging macro environment, we are encouraged by the strong operational and financial results we delivered in the second quarter of 2023.

Driven by our stable and better-quality borrower base, we achieved solid operational metrics in the second quarter in the China market. Cumulatively, we have served over 24 million borrowers in China, with the number of unique borrowers at around 2.3 million, up 5% sequentially.

Additionally, our China transaction volume reached RMB45.5 billion, while our outstanding loan balance reached RMB62.6 billion as of June 30, 2023, both up 12% on a year-over-year basis.

Bolstered by our prudent approach to risk management with proven fraud detection technologies, we have maintained a stable risk level. In the second quarter of 2023, our Day-1 delinquency rate was around 5.6%, and vintage delinquency rate is expected to be around 2.3% for the quarter.

Finally, thanks to our loan collection team's impressive efforts, our loan collection recovery rate maintained stable at around 90%.

As we continued to fine-tune our strategy of serving better-quality borrowers, our proportion of category A-and-B borrowers in the China market further expanded to 80% of our total borrowers in the second quarter, compared with 74% in the same period last year.

Furthermore, our transition to better-quality borrowers helped us to further optimize our funding cost during the quarter.

We have also expanded our number of cumulative funding partners to 82 financial institutions, and our pipeline of potential partners remains robust. All these operational improvements enable us to maintain a healthy take rate of around 3.1% during the second quarter.

As a company deeply committed to social responsibility, we continued to support small business owners during this challenging period. We have also noticed that our small business owners' segment has been recovering at a healthy pace. Most of our borrowers from this segment are focusing on wholesale, retail, food and beverages industry.

During the quarter, we served around 459,000 small business owners and facilitated RMB11.5 billion of loans for them, representing an increase of around 11% compared with the same period last year and up 12% sequentially.

Now I'd like to share some additional details on our international expansion efforts. Indonesia, our largest overseas market, recorded continued growth in its macro-economy during the second quarter. Notably, on a monthly basis, the Manufacturing PMI grew by

2.2 points to 52.5 points, and the Business confidence index reached 99%. Indonesia's economy continued to remain robust in the second quarter and has maintained growth of 5% over the past several quarters.

Going forward, Indonesia economy is expected to maintain growth of around 5% in 2023. We anticipate that its domestic consumption will remain robust.

We are excited about the progress we've made in our overseas markets across multiple operational and financial metrics. Cumulatively, we have served over 4 million borrowers in Indonesia and the Philippines and continue to demonstrate significant growth in these countries, with the number of unique borrowers served during the quarter reaching a new high at 786,000, up 22% from the same period last year.

International transaction volume soared by 100% year-over-year during the second quarter, reaching RMB1.8 billion, while we set a new record in our outstanding loan balance at RMB1.1 billion, up 131% year-over-year.

Our operations in the Philippines have also exhibited stronger-than-expected growth across numerous operating metrics. On a year-over-year basis, the number of unique