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Edited Transcript of WEI.N earnings conference call or presentation 11-Dec-18 12:00pm GMT

Q3 2018 Weidai Ltd Earnings Call

Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Weidai Ltd earnings conference call or presentation Tuesday, December 11, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Roger Hu

Christensen - IR

* Leo Li

Weidai Ltd. - CFO

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Conference Call Participants

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* John Cai

Morgan Stanley - Analyst

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Presentation

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Operator [1]

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Hello and welcome to the Weidai Limited third-quarter 2018 earnings conference call. (Operator Instructions). Please note, this event is being recorded.

I now would like to turn the conference over to Roger Hu of Christensen. Please go ahead.

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Roger Hu, Christensen - IR [2]

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Thank you, operator. Hello, everyone, and thank you for joining Weidai's third-quarter 2018 earnings conference call. The Company's results were released earlier today and are available on the Company's IR website at weidai.investorroom.com.

On the call today are Mr. Hong Yao, the Company's Founder, Chairman of the Board of Directors, and Chief Executive Officer; and Mr. Leo Li, Chief Financial Officer. Leo will go through the third-quarter financials, and they will both be available to answer your questions during the Q&A session that follows.

I'll remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause the Company's actual results, performance, or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties, and factors is included in the Company's filings with the US Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under law.

With that, I will now turn the call over to Mr. Leo Li. Leo, please go ahead.

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Leo Li, Weidai Ltd. - CFO [3]

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Good evening and good morning, ladies and gentlemen. Thank you for joining our third-quarter earnings call. Before we begin, I'd like to briefly recap that in our prospectus filed with the SEC, in that prospectus we had our key operating numbers up until the end of September this year, as well as the first nine months' P&L and first six months' P&L for the year. So what we're announcing today is consistent with what we disclosed in the prospectus.

First of all, I'd like to recap on our third-quarter financials. Looking at our top line, net revenues increased 9% Q-on-Q versus the second quarter. And I think that is an achievement considering the challenges that the industry faced in the third quarter.

Moving on, looking at provisions, third-quarter provisions increased substantially compared to the second quarter for two reasons. One was the industry turmoils that we suffered during the third quarter, where a number of platforms failed and a number of borrowers took the opportunistic attitudes, waiting for platforms to suffer or go through a challenge, rather than paying back timely. So we were affected by that trend, which spread throughout the industry for the third quarter. That's reason one.

Reason two, I think recent data and market commentaries have noted that the China macro has become more difficult, and we are also affected by that trend.

Next, going into operating expenses. The biggest line of our OpEx, which is the operating -- which is the origination and servicing expenses -- that line decreased quarter-on-quarter. So as a percentage of revenue, our origination and servicing expense was 41.3% for our third quarter. This compares with 52.6% for the first quarter of 2017; 53.4% for the third quarter of 2017; and 47.5% for the second quarter of 2018.

So we've seen that OpEx line as a percentage of revenue to continue to trend down, for two reasons: operating leverage, as well as cost optimization for our off-line infrastructure.

In addition to origination and servicing expenses, our sales and marketing expenses increased quarter-on-quarter, in the third quarter, as we conducted more marketing activities in the third quarter. Our G&A increased in the third quarter. We expect our fourth-quarter IPO-related expenses, which sits under G&A, to increase substantially versus the first quarter as we completed our IPO in November. Our research and development costs both increased low-single-digits quarter on quarter.

Looking at our bottom line: our adjusted non-GAAP net income -- which is our GAAP net income, adding back share-based compensation -- reached RMB215 million compared to RMB205 million in the second quarter. This is primarily due to an increase in our top line, as well as the cost optimization for our origination and servicing expenses.

For the first nine months of 2018, on a non-GAAP basis we reached RMB578 million non-GAAP net income. This is a growth rate of 31% versus the same period last year. If we look at the run rates for the first nine months of 2018 of RMB578 million for the first nine months, this run rate exceeded our own internal forecast for the year of RMB700 million, which is an internal forecast that we made at the start of this year. We're running slightly ahead of our forecast for the first nine months.

In summary for the third quarter, we anticipated industry operating environments to become more difficult at the start of the third quarter, and that showed in two aspects. First was increased delinquencies; and second, a reduced or somewhat lack of retail investors' confidence in online retail, in online financing platforms.

Out of these two challenges, we've seen the second challenge receding. Our funding costs have gone back to pre-crisis levels. We've seen the second issue dissipating away. But the first issue has not dissipated away. And we expect our delinquencies and provisions to stay at a relatively elevated level in the near term.

So that concludes our brief discussion for the third quarter, and like to open up this call for questions. And just to remind everyone, we have our Founder and CEO, Mr. Yao on the call, and myself. If you'd like to ask our Founder a question in Chinese, please help translate yourself in English. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions). John Cai, Morgan Stanley.

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John Cai, Morgan Stanley - Analyst [2]

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(spoken in Chinese)

So I have two questions. The first question is from the take rate. So during the challenging environment in the third quarter, the Company did manage to report a net revenue of Q-on-Q increase on the facilitation fee, so benefiting from the increase in the branded take rate. So I was -- so my question is about the outlook of this take rate. Do we see any further room for improvement? Or do we see any competition pressures that would lead to the decline of this take rate?

And the second question is on the asset quality and delinquency. The Company also reported M3-plus delinquency rates by vintage. And based on the chart, we can see, entering into November, the vintage from the second quarter this year and the first quarter this year has actually showed some dramatic improvement. And so, my question is that does that indicate any improvement in terms of the overall delinquency trends?

And also on the provision side, can the management share some sort of coverage ratios in terms of the -- our provision at the moment, as a percentage of the delinquency rates or NPL? Thank you.

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Leo Li, Weidai Ltd. - CFO [3]

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Thank you, John, for the questions. I will answer those two questions. The first one on take rate: for the third quarter, we've tweaked our take rate by tweaking product mix. So we have done a higher proportion of products or loans with higher margins, so that has reduced -- that has led to an increase in our take rate.

Bear in mind, our funding costs increased in the third quarter by about 1.5 percentage points. So if you see a net take -- if you see a take rate increase, that has meant that our product pricing take rate has increased more than that, more than what we have seen by looking at our top line, dividing by our loan balance. So we did achieve a take rate increase in the third quarter.

Going forward, fourth-quarter product mix relatively stable compared to the third quarter, so we don't expect significant movements in product mix for the fourth quarter. And looking into 2019, we are -- as a background, I think we are aware that our industry, the online P2P industry, currently faces a loan balance cap. And we would look to grow our top line. We can grow that by leveraging increased institutional funding. We can also grow that by leveraging our take rate. So we could look at that as one of our growth -- one of the ways that we can grow our top line, going forward. So that's on the first question.

On the second question on the delinquency rate -- and the vintage chart, as well as our tables -- if you look at our delinquency table in the earnings announcement, the biggest proportional increase actually happened for the section that is 61 to 90 days delinquent. And if you look at that -- because that table was done at the end of September. So if you backtrack, then that would indicate we had significant increases in delinquencies in July, and to a lesser extent in August.

So this coincided with the industry challenge that we faced for -- during the third quarter for China's P2P industry. So we spent more manpower, more efforts going after delinquencies, reminding borrowers to repay, following the industry challenge that initiated at the start of July.

So we've seen that trend improving a little bit. So if you look at our vintage delinquency chart, you can see some improvement in the subsequent periods. But we have not gone back to pre-crisis levels. So we are slightly better, but we have not gone back to our levels in the second quarter for this year. So that's on delinquency trends.

If you look at our provision coverage ratio, for the -- at the end of September 2018 -- well, first of all, we have three types of products. We have auto-backed loans. We have other secured loans, primarily home equity loans. And the third category would be unsecured loans.

So looking at those category one by one, auto-backed loans, our provision coverage ratio -- which is looking at the provision balance and dividing by the past due loan amounts -- if you look at our provision coverage ratio for the loans that are 90 days plus overdue for the auto-backed loans, they were -- the coverage ratio was 111% at the end of September compared to 90% at the end of June this year, compared to 90% at the end of last year. That's the 90-day-plus coverage ratio.

The 180-day past due coverage ratio stood at 158% at the end of September compared to 144% at the end of June this year, and 135% at the end of 2017. So that's for auto-backed loans.

Then for the other secured loans, primarily home equity loans, the provision coverage ratio -- for our internal management purposes, we look at 180-day and 360-day past-due coverage ratios. These stood at 29% and 200% for that category. Those are primarily home equity-backed loans with an LTV ratio in the range of 60% to 70%, on average. So we believe that we're adequately provisioned for that type of product.

Then, lastly, looking at our unsecured loans, the provision coverage ratio looking at 90 days plus, that stood at 104% at the end of September. So overall we believe we have adequately provisioned, and we would always like to stay conservative on the provision side of things.

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John Cai, Morgan Stanley - Analyst [4]

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Thank you, Leo. That's very clear. So can I have a quick follow-up on the take rate? Yes, so you mentioned that to -- under the balance [cap to] increase, our revenue, we can potentially increase the take rate. I just wonder, do you see any competition pressures on increasing the take rate based on [the RV] on the auto-backed loan industry at the moment?

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Leo Li, Weidai Ltd. - CFO [5]

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We have not encountered significant competitive pressure in our industry. And bear in mind the -- as the overall P2P industry cleanup progresses through, the first type of platforms that get completely cleaned up are small platforms. A lot of our incumbents utilize funding, or are themselves small P2P platforms or funded by small P2P platforms. So we have seen supply actually being cleaned up somewhat in our sector as regulation progresses through, throughout this year.

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John Cai, Morgan Stanley - Analyst [6]

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Okay. Thank you very much.

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Operator [7]

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Thank you. And as there are no more questions at the present time, this concludes the question-and-answer session as well as the call itself. Thank you so much for attending today's presentation. You may now disconnect your lines.