Q4 2023 FinVolution Group Earnings Call
Participants
Jimmy Tan; Head of IR; FinVolution Group
Tiezheng Li; Vice Chairman, President, & CEO; FinVolution Group
Jiayuan Xu; CFO; FinVolution Group
Yada Li; Analyst; China International Capital Corporation (Hong Kong) Limited
Cindy Wang; Analyst; China Renaissance
Alex Ye; Analyst; UBS Securities Asia Ltd.
Presentation
Operator
Hello, ladies and gentlemen. Thank you for participating in the fourth-quarter and full-year 2023 earnings conference call for FinVolution Group. (Operator Instructions) Today's conference call is being recorded.
I will 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 fourth-quarter and full-year 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 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 US GAAP. For information about these non-GAAP measures and reconciliation with 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company results may be materially different from the views expressed today.
Further information regarding these and other risks and uncertainties are included in the company filings with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statement except as required under applicable law. Finally, we post 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
Thank you, Jimmy. Hello, everyone, and thank you for joining our earnings call. (spoken in Chinese) Tiezheng Li, CEO of FinVolution Group. We are happy to speak with you today.
When I became CEO one year ago, FinVolution set a clear objective: become a leader in the fintech industry, providing inclusive financial solutions for unserved borrowers and small business owners. In 2023, we advanced toward that goal, with continued strong execution of our local focus, global outlook strategy, adapting to the unique situations in different markets.
I'm thrilled to report that we delivered exceptional progress on all fronts. Throughout the year, we maintained our robust momentum, with a progressive expansion in China while pursuing much faster growth internationally, where economic conditions were more favorable.
We have achieved leadership positions in both Indonesia and the Philippines, while also fortifying our success and high-quality growth in China as we proactively adjust our strategies to suit China's dynamic economy. Performance-wise, we continue to grow our business across the board despite evolving macroeconomic challenges.
The cumulative number of borrowers we served in China, Indonesia, and the Philippines has reached 30 million, growing at an accelerated pace with a net increase of around three million new borrowers year over year. For full-year 2023, our total transaction volume reached RMB194 billion, and our outstanding loan balance reached RMB67 billion, representing year-over-year increases of 11% and 4%, respectively.
Net revenue for the full-year 2023 reached RMB12.5 billion, up 13% year over year. Our international business grew exceptionally well in 2023, propelled by our effective global outlook strategy of pursuing rapid growth in overseas markets. International transaction volume for 2023 soared to RMB7.9 billion, and outstanding loan balance rose to RMB1.3 billion, up 85% and 58%, respectively, compared to the prior year.
International market revenue increased to RMB2.1 billion, up 86% from full-year 2022. Over the past year, international revenue contributions to total revenue increased significantly, rising to 17% in 2023 from 10% in 2022.
Meanwhile, with our local focus strategy of pursuing high-quality growth in China, we continue to achieve progressive growth domestically. Transaction volume increased to RMB186 billion, while outstanding loan balance reached RMB66 billion, up 9% and 4%, respectively, compared to the prior year. Revenue from the China market in 2023 further expanded to RMB10.4 billion, up 4% compared to the prior year.
Another notable improvement was funding cost, which improved by 30 bps on a quarterly basis and by around 100 bps year over year. Our stable borrowing rates, coupled with better-than-industry delinquency rates and enhanced operational efficiency, enabled us to sustainably deliver higher ROA compared to the industry.
We also strengthened our commitment to small business owners, supported by a prudent approach during this fragile and sometimes, volatile recovery period. In 2023, we served over 811,000 small business owners and facilitated RMB47 billion of loans for them, up 80.5% compared with last year and representing 25% of total transaction volume in China.
FinVolution is a fintech frontrunner with profound expertise across an extensive industry footprint. Part of our commitment to shareholders is to continue propelling the company's sustainable development and industry-wide digital transformation through technology innovation. I'd like to share just a few of the pivotal technological advancements we made throughout the year.
We amplified our investment in technological R&D, driving high-quality growth, leveraging cutting-edge technology. We significantly improved and optimized our operational process across all markets in which we operate. This includes increased R&D investment of over RMB500 million in 2023 to strengthen different aspects of our technologies, such as the automatic speech recognition capabilities, greatly improving its grasp of Chinese dialects while boosting our chatbot's efficiency and accuracy.
R&D is critical to our ongoing success, and we continue to invest in our tech and our people. As of December 31, 2023, we proudly employed a dedicated R&D team of around 700 skilled professionals and have built a comprehensive IP portfolio that comprises 239 registered software copyrights and a successful filing of 179 patent applications, including 53 invention patents already granted.
Each of our R&D accomplishments enhanced our offering to consumers and set new benchmarks for the financial services industry, supporting FinVolution's growth and industry-wide progress. In recognition of these efforts, the Shanghai Municipal Commission of Economy and Information (sic - "Informatization") recently honored FinVolution on its Shanghai 2023 Double 100 list for software and IT service excellence.
We earned prestigious rankings on both lists, securing the 18th and the 26th positions, respectively. These commendations recognized our contributions to technology innovation and the advancement of the industry.
Last but not least, ESG remains a top priority at FinVolution. We diligently enhanced our integrated ESG program throughout 2023, with a focus on inclusion and giving back to society. For example, we have accumulated -- offered RMB120 million of interest-free loans for eligible small business owners to help turn their dreams into reality.
Our commitment and efforts have also been recognized by several renowned independent rating agencies with above-average industry rating. We celebrate FinVolution's 16th anniversary in 2023, a milestone that affords us a glimpse of our future prospects as an enterprise grounded in sustained long-term growth.
Over the past 16 years, our business model and strategy have been validated by success in the face of multiple challenges, such as the P2P transition, shift towards better-quality borrowers, and international expansion amid the pandemic. As an independent platform with limited resources, we are proud to have expanded and flourished in all markets in which we operate.
Going forward, we will remain committed to serving borrowers in our existing markets, while increasing the pace of our international expansion by acquiring more licenses and expanding into additional countries and regions to deliver innovative financial services to more borrowers. Our local focus, global outlook strategy will continue to guide us and drive our healthy and sustainable development as we embark on 2024.
By leveraging our peerless technologies and operational advantages, we are confident to replicate our domestic and international success in new markets, unlocking value and making the company a world-class fintech enterprise while consistently returning value to our shareholders.
With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our operational and financial results.
Jiayuan Xu
Thank you, Li, and hello, everyone. Welcome to our fourth-quarter and full-year 2023 earnings call. Let's go through our key results for the fourth quarter. To be mindful of the length of our earnings call today, I encourage listeners to refer to our fourth-quarter earnings press release for further details.
Despite GDP growth of over 5% in 2023, China's overall economic environment continues to evolve. We leveraged our various strengths to navigate the turbulence and conclude 2023 on a solid note. Our domestic transaction volume reached RMB50 billion for the fourth quarter, up 6% year over year and 2% sequentially, while outstanding loan balance grew to RMB66 billion, up 4% year over year and 2% sequentially.
Achieving growth in both metrics amid such a soft consumer environment is a testament to our business resilience, as well as our outstanding technology innovation and operational excellence. We have observed several notable improvements as we move through the first quarter of 2024.
During the recent Lunar New Year, consumption activities picked up rapidly with 474 million tourist trips nationwide, up 19% from the comparable period in 2019. Total tourism spending also climbed 8% to RMB633 billion from the comparable period in 2019, with air and train travel surpassing 2019 levels by 15% and 36%, respectively, reaching new record highs.
Box office ticket sales also rebounded and reached more than RMB8 billion, setting a new record for the holiday period. Furthermore, several macro metrics exhibited varying degrees of improvement. For example, total social financing in January increased to RMB6,500 billion, up 9.5% year over year.
Total retail consumption in December was increased to RMB4,355 billion, up 7.4% year over year. Fabric manufacturing and service PMI index also improved slightly to 49.1 points and 15.1 points. We believe these signs reflect the dawn of a new era, wherein consumer spending trends are shifting away from large-ticket items, such as automobiles and property, to small-ticket items like travel-related expenditures and other consumption activities.
Amid these complex dynamics, we drove a modest yet encouraging recovery in our consumer credit demand through our ongoing refinement of borrower demographics and quality, with the number of new borrower applications increasing by between 3% to 5%. Cumulatively, we have served over 25 million borrowers in China, and the number of unique borrowers for the fourth quarter was 2.1 million.
In addition, we further enhanced our credit risk assessment and fraud detection technologies during the quarter, which empowered us to navigate the macro headwinds and stabilize our asset quality. Our day-one delinquency rate improved to 5.3% in December and further improved to 5.2% in February.
We expect our vintage delinquency for the most recent three months to be 2.5%, demonstrating our business resilience. Boosted by the deployment of our advanced speech recognition technologies as well as the AI-powered chatbots we mentioned earlier, our loan collection recovery rate for the recent three months remained healthy at 87%.
In terms of our funding partners, as our reputation in the industry continued to rise, we have further diversified our funding resources. The cumulative number of our funding partners has expanded to 94 financial institutions as of the end of the fourth quarter, with funding costs improving by around 100 basis points year over year.
Moving on to our second growth driver, our international expansion, which continues to outperform our targets and expectations. We embarked on our global expansion in January 2018 and have been deeply investing in elevating FinVolution's visibility worldwide, overseas.
Indonesia, our first overseas market, continued to record macroeconomic growth. Its consumer confidence index remained high at 125 points in January. Full-year sales of the motorcycles, the most popular mode of transportation in Indonesia, surged by 19.4% to 6.2 million units year over year.
Our second overseas market, the Philippines, also ended 2023 with positive macro data. The Philippines were among the fastest-growing economies in Asia, with fourth-quarter GDP growth of 5.6%. Manufacturing PMI was 51 points in February and has remained above 50 points since September.
Cumulatively, we have served over 4.8 million borrowers in international markets as we continue to explore diversified consumer acquisition channels to attract new borrowers. The number of new borrowers for international markets increased by 20% year over year to 1.37 million. And the number of unique borrowers rose by 18% year over year to around 1.9 million in 2023.
International transaction volume for the full-year 2023 rose by 85% year over year, reaching RMB7.9 billion. Transaction volume for the fourth quarter reached RMB2.25 billion, up 64% year over year. At the same time, our outstanding loan balance as of December 31, 2023, grew to RMB1.3 billion, up 58% year over year.
As we deepened our roots in Indonesia and fortified our reputation, the population of loans facilitated from local financial institutions in Indonesia increased to over 90% from 63% in the same period of 2022, reflecting our credit assessment model's effectiveness as well as deepening trust from local financial institutions.
The Philippines has also demonstrated excellent growth. During 2023, the number of new borrowers in the Philippines grew by over 188%. This led to exponential growth in its transaction volume and outstanding loan balance, which surged by over 200% on a year-over-year basis, contributing around 20% of international transaction volume in the fourth quarter.
Thanks to our proven record as a trusted lending partner, we have also secured institutional funding in the Philippines and also have a strong pipeline of future institutional partners in place. These accomplishments have boosted our confidence as well as our visibility as we emerge as one of the top players in the Philippines. In 2024, we expect our Philippines operation to maintain its robust high double-digit growth momentum.
International business revenue in the fourth quarter progressively increased to RMB602 million, up 53% year over year, and represented around 19% of the company's total revenue. From a full-year 2023 perspective, international revenue reached RMB2.1 billion, up 86% year over year, and representing 17% of the company's total revenue, marking a significant achievement in our international development.
This success has readied us to amplify our international expansion efforts with strategic initiatives, such as refining borrower demographics, acquiring license, and venturing into new countries. The outstanding progress we have made in our overseas markets across multiple operational and financial metrics serves as a springboard for our ongoing expansion and development.
On a related note, we continue to build our international business presence and brand awareness on leading social media platforms through AIGC-driven upgrades to our creative advertising campaigns. As of the end of the fourth quarter, we had more than one million followers on Facebook. And our followers on TikTok grew at an accelerated pace to reach over 816,000, up more than 15% quarter over quarter. Social media will be a key means of reaching our target audience with our overseas marketing efforts as we enter new countries and debut innovative products.
Now, turning to our financial metrics. Driven by strong execution of our local focus, global outlook strategy, net revenues for full-year 2023 increased to RMB12.5 billion, up 13% year over year, while net income increased to RMB2.38 billion, up 5% year over year. As of the fourth quarter, our leverage ratio, which is defined as the risk-bearing loans divided by shareholders' equity, remained stable at 4.1 times, reflecting opportunities for growth when the macroeconomy mobilize.
Our strong balance sheet and liquidity position continued to enhance shareholders' confidence while providing us with optimal flexibility to execute our strategy. In particular, our cash position remains robust with over RMB7.9 billion of cash and short-term liquidity as of the end of December 2023, representing an increase of 12% year over year. We believe our current cash position is sufficient to support our business expansion while increasing our return of value to our shareholders.
Now, let me briefly update you on our capital return program. Since 2018, we have continuously returned value to our shareholders in the form of share repurchase and dividends. Recently, our Board of Directors approved our sixth annual dividend in the amount of USD0.237 per ADS, an increase of 10.2% year over year.
For full-year 2023, we returned a total amount of USD160 million to our shareholders, consisting of USD62 million in dividends and USD98 million through share repurchase, representing a capital return rate of around 49% of 2023 net income. As of December 31, 2023, the company has cumulatively returned USD605 million to our shareholders. These actions underscore our consistent commitment to enhancing shareholder value.
Before I conclude my remarks, I would like to provide some additional color on our business outlook for 2024. Despite the evolving macro environment, our business continues to thrive and progress. We are gaining substantial momentum as we focus on advancing our international initiatives, preparing technological innovation, expanding our healthy consumer base, and optimizing our product profile.
As a result, we expect our transaction volume in the China market in 2024 to be in the range of RMB195.7 billion to RMB205 billion, representing an increase of around 5% to 10% year over year. In addition, we expect international transaction volume in 2024 to be in the range of RMB9.4 billion to RMB11 billion, representing year-over-year growth of around 20% to 40%.
That concludes my prepared remarks. We will now open the call to the questions. Operator, please continue.
Question and Answer Session
Operator
(Operator Instructions) Yada Li, CICC.
Yada Li
(interpreted) Then I'll do the translation. Firstly, considering the current macro environment, I was wondering what adjustments have we done in the lending strategy, customer acquisition, and risk management? And with the help of these measures, how to view the asset quality going forward?
And secondly, for the international branches, what are the growth and profit outlooks for Indonesian and Philippine markets, respectively? That's all. Thank you.
Tiezheng Li
(interpreted) Okay, Yada, let me do the translation. From observation and study, China's macroeconomy is still facing uncertainties but expects to have a gradual recovery. Around the third quarter last year, we have observed some negative impact on the industry, which results in asset fluctuations.
We have been quick with our responses. For example, we have reduced customer acquisitions from lower-quality channels and stepped up our model updates from higher-quality channels, updating the models, tightening the approval rates and credit limit for borrowers, who are more prone to economy uncertainties, such as those with a higher level of debts.
We have also closely monitored changes in our core metrics, such as day-one delinquency and loan collection recovery rates for the disbursed loans. And through the analysis of different borrower segments and tighter approval rates, we have ensured financial services for higher-quality borrowers, example those with lower debt levels, remain intact.
For post loans, I believe you are aware of the impact on loan collections due to the reductions of telephone lines. The impact on us is minimal due to our sufficient advanced preparations of telephone lines, which are able to satisfy the needs of our post-loan collection team. Although our loan collection recovery rates slightly declined from 89% to 87%, we are still leading ahead of the industry.
And with the implementation of these efforts, we have seen positive results in December. For recent three months, our day-one delinquency rate improved to 5.3% from 5.7% in the third quarter, and further improved to 5.25% in February, while loan collection recovery rate remained stable at 87%, with vintage delinquency returning to 2.5%.
Our recovery should be ahead of the industry. And we are confident to maintain industry-leading asset quality, with continuous improvement going into 2024.
Your question is on the whole international expansion, and we will break down the explanation into different countries. For example, Indonesia has a new price cap in 2024. Our Indonesia operations in the fourth quarter has been impacted by local regulation change.
And since January 1, 2024, all our new loans have met regulator requirements and fully compliance. The pricing adjustments means that our borrowers cohort model data and rules have to undergo a series of adjustments. Based on our past experience, we will need around six months to complete all these changes.
And from the current outcome, these changes have been positive. Example, through adjusting our borrowers cohort, the risk metrics have improved by 20%, reducing the impact of rates reduction. And also, from a customer acquisition perspective, we have seen many small and medium platforms reducing their customer acquisition efforts, which led to an 8% decrease in our customer acquisition costs.
And this further helps to reduce the impact of price reduction in Indonesia. And thus, in the first half of 2024, Indonesia operation focus will be on product adjustment and improving the quality instead of a rapid growth.
And during the second half of 2024, we will re-evaluate our strategies based on macro situation. And in 2024, we expect Indonesia to achieve profitability. The profitability from the business view will be better compared to the financial view due to the rules of the accounting policies.
In addition, we have also disclosed some additional data points for our Philippines operations. Over the past few years, Philippines operations have been developing very rapidly. And from current observation, Philippines country's economic and regulatory environment has been relatively stable.
We will expect the rapid growth to continue into 2024, and we are currently number two in the segment of the market. We believe we can achieve our target of number one by the end of the year. Additionally, we expect that our Philippines operations can achieve profitability in the second half of the year under the relevant accounting rules.
We have managed to achieve profitability in both Indonesia and Philippines. And going forward, we will consider to strengthen our investment in different types of licenses, diversify our operations, and enhance our brand image to further increase our competitive advantage.
We are also actively exploring new countries, and these countries are not limited to Southeast Asia. And we also consider other methods of expansion to speed up our international footprint.
Okay. Thank you, Yada.
Jimmy Tan
Thank you, Yada.
Yada Li
(inaudible)
Operator
Cindy Wang, China Renaissance.
Cindy Wang
(interpreted) Thank you for taking my call, and I have two questions here. So the first question is related to the customer acquisition cost. Since you are aggressively on the international market expansion, so what is your CAC target this year?
And the second is related to the Philippine market. The Philippine market grows very strong in 2023. Can you talk about the competitive landscape, and how do you achieve to be a first -- number-one market share position this year? And how will that contribute to the international market revenue in 2024? Thank you.
Tiezheng Li
(interpreted) Cindy, let me do the translation. We have been operating in the Indonesian market for quite a period of time, in fact, six years. And we have a deep understanding of the market. Information continues to be the main method to acquire better-quality borrowers for us. Although the pricing cap has some impact on our operations, we have made adjustments to our models, and the results have been very positive.
For example, when we have higher-quality borrowers, we are able to increase our loan -- our ticket size with longer loan tenure. And the fee rates further improve, with weaker competition. And we believe this trend will continue in 2024. And we will re-evaluate our customer acquisition strategies in the second half when the macro environment stabilizes.
For the Philippines, it is in a much earlier stage compared to the Indonesian market. Over the past two years, our marketing efforts are much more proactive, and it has been pretty stable among the tops. And we believe this trend will continue into 2024.
We entered the Philippine market in 2020, and this is our fourth year of operations. Philippines has a population of around 130 million, and our target customer base is around 40 million. To date, we have registered users of around five million, and our borrowers is around 740,000.
There are currently over 100 players, and the largest players are from the US and local Philippines companies. We believe as a fintech company from China, our advantages are obvious. And we will continue to leverage on our advantages and duplicate our success in China and Indonesia in the Philippines market.
Around 20% of our transaction volume for the international market is coming from the Philippines in the fourth quarter. And we believe this proportion will continue to increase in 2024.
Okay. Thank you, Cindy.
Operator
Alex Ye, UBS.
Alex Ye
(interpreted) I'll do the translation. First, on the Indonesian market, after the pricing adjustment starting this year, how do you expect the impact on revenue and earnings? And do you expect any further move from the regulators with regard to the timetable to further adjust the pricing cap? And how will we tackle the trend?
And second, in terms of the total shareholders return, we know the company has also speeded up the pace of share repurchase this year, bringing the total payout ratio to 48.5%. So how should we expect a more sustainable payout ratio going forward? Thank you.
Tiezheng Li
(interpreted) Hello, Alex. Let me do the translation. We have actually shared some Indonesia data earlier. We expect the takeaway after our pricing adjustment to be around 10%. And parallel to the pricing adjustment, it was around 13%.
And from an ROA perspective, we expect it to be around 2.4% after the deduction of CAC and some other costs. And based on the current regulator's advice, there might be a further change in price reduction. We need to re-evaluate this in the second half of the year. However, based on the current [UEE], we believe our business will remain at a healthy level even if further price reduction kicks in.
First of all, I would like to reiterate FinVolution position. We are a global consumer finance technology company. Our success has been validated in China, Indonesia, and the Philippines, with leadership position.
In the recent years, as China market matures, our business entered into a stage known as high-quality progressive growth. On the other hand, based on our observation, the international markets are still in early stages of development where market opportunities for growth is enormous. And we are very confident to cement our success in Indonesia and the Philippines while expanding to more countries and showing a rapid growth rate for our company.
Our capital return program is closely in line with our company positioning. We hope rapid and healthy business growth can be the main way to create value for our shareholders. Over the last three years, we have proven this point.
We have completed the business transition of our China business and expanded internationally, with an average CAGR growth of over 44% and revenue growth of around 20%. And apart from this, we have also returned value to our shareholders through our capital return program.
We began our dividend program and share repurchase program since 2018, the earliest in our industry. Over the last six years, we have cumulatively returned over USD600 million to our shareholders, equivalent to almost half of our market cap today.
In 2023, we deployed close to USD100 million to repurchase our shares and USD62 million for dividend distribution, representing around 50% of net income for 2023 and a combined dividend of 11%. In 2023, our dividend per ADS was USD0.237, the fourth year of consecutive increase. And on the five years' average, this increase in dividend was above 10%.
And I would like to emphasize on this. For China ADR, there are not more than six companies with five years of consecutive dividend and consistent increase in EPS. And we are one of these companies. And in summary, we are returning value to shareholders in terms of growth and a leading capital return program.
Going forward, we will continue with this belief and let high-quality growth remain as our core method to return value to our shareholders and concurrently, maintain a leading capital return program. Regarding dividend, we are confident to maintain our track record and continue to deliver consistent increase in dividend for our shareholders. Alex?
Alex Ye
(spoken in Chinese) Thank you.
Operator
As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.
Jimmy Tan
Thank you, all, once again for joining us today. If you have any further questions, please feel free to contact FinVolution's Investor Relations team.
Operator
This concludes the conference call. You may now disconnect your line. Thank you.
Editor^ Portions of this transcript that are marked (interpreted) were spoken either by an interpreter present on the live call or by the speakers themselves. The interpreter was provided by the company sponsoring this event.
