Yirendai Ltd. Fourth Quarter and Full Year 2015 Earnings Conference Call Thursday, March 10, 2016, 8:00 AM Eastern Officers Mr. Matthew Li; Director IR Mr. Ning Tang; Executive Chairman Ms. Yihan Fang; CEO Mr. Dennis Cong; CFO Mr. Huan Chen; Director, and Chief Strategy Officer of CreditEase, Analysts Richard Shu; Morgan Stanley Dick Wei; Credit Suisse Eric Wen; Blue Lotus Tian Hou; TH Capital Presentation Operator: Good day, and welcome to the Yirendai Limited fourth quarter and full year 2015 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there'll be an opportunity to ask questions. (Operator Instructions) Please note, this call is being recorded. I would now like to turn the conference over to Mr. Matthew Li, Director of Investor Relations. Mr. Li, please go ahead. Mr. Matthew Li: Thank you, and welcome to Yirendai's fourth quarter and full year 2015 earnings conference call. Our earnings release and presentation slides are available on the investor relations section of our website. Hope you had the chance to review them by now. Today's call features presentations by Mr. Ning Tang, our Executive Chairman, Ms. Yihan Fang, our Chief Executive Officer, and Mr. Dennis Cong, our Chief Financial Officer. Mr. Huan Chen, Director of Yirendai and Chief Strategy Officer of CreditEase, will join the presenters in the Q&A session later on. Before beginning, we would like to remind you that discussions during this call contain forwardlooking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties, and factors that may cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties, or factors is included in Yirendai's filings with the U.S. Securities and Exchange Commission. Yirendai does not undertake any obligation to update any forward-looking statement, except as required under applicable law. During this call, we will be referring to several non-gaap financial measures as 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 reconciliation to GAAP measures, please refer to our earnings release. 1 / 11
With that, I will turn the call over to our Executive Chairman, Mr. Ning Tang. Mr. Tang, please begin. Mr. Ning Tang: Thank you, Matthew, and thank you all for joining our first conference call as a public company after our successful IPO in December of last year. Yirendai's IPO was an important milestone for us and the history of the Company. We are committed to supporting the growth of our business and extending our leadership position in China's online consumer finance industry. Our business hit a number of new records during the quarter, which is indicative of the growth momentum that we have gained heading into 2016. I'd like to begin by first going over the state of our industry, its regulations and our long-term business strategy. Yihan will then go over recent business developments, followed by Dennis, who will then go over our financial results and guidance for Q1 and full year 2016. We will all be available to answer your questions in the Q&A session that follows. I'll begin by going over the current state of the industry. China's economy is currently going through a transition towards greater consumption, consumer consumption. Consumption is increasingly forming a larger portion of China's GDP growth and is driving growth in demand for consumer credit. China's consumer credit balance reached RMB18 trillion, or 27.6% of China's GDP by the end of 2015, still at a very low level when compared with the 72% it accounts for in the U.S. Strong consumer credit demand provides enormous opportunities for consumer finance companies, a significantly underserved sector given the relatively conservative stance that Chinese banks take towards consumer credit. The unsecured portion of consumer credit demand was estimated to be RMB4.9 trillion by the end of 2015, which is the addressable market opportunity for Yirendai. With China GDP growing at 6% to 7% on an annual basis, we see stable economic conditions among our target borrower base in terms of salary income and employment rate. Yirendai continues to focus on serving the prime urban salary workers' unsecured consumer loan for consumption needs. On the investor side, we continue to see strong demand from individual investors on our platform for quality assets to invest in, and we also see increasing interest from traditional financial institutions. From a regulatory perspective, China's Banking Regulatory Commission, or CBRC, issued consultative guidelines for the online lending industry in December 2015. The guidelines laid out defined rules and requirements for online lending platform business operations. We see this as a very positive development for our industry and a key step forward toward a more rational and healthy industry environment. We believe Yirendai is in full compliance with current laws and regulations and that we will benefit from improved industry regulatory developments. We have begun 2016 with strong growth momentum and a improved regulatory environment. Yirendai will continue to focus on developing our online marketplace platform and risk management system to better serve our customers and further extend our market leadership position. I'll then turn the call over to Yihan. Yihan, please go ahead. 2 / 11
Ms. Yihan Fang: Thanks Ning. I'd like to begin by summarizing some of the key milestones we achieved since the launch of our business in 2012. We originated a total of US1.9 billion in loans through our platform, and our current outstanding loan principal balance reached US1.4 billion at the end of 2015. During the quarter, Yirendai generated record loan originations of US510 million, up 189% year over year, with record net revenue of US71 million, up 279% versus Q4 of last year. EBITDA was US20 million for the quarter with net income of US13 million. While we continue to see strong demand on our platform from both borrowers and investors, we remain focused and disciplined about our growth rate as we continue to invest and scale our online marketplace, develop our risk pricing models, introduce new products, and enhance our brand. On the borrower side, in Q4 our platform facilitated loans for over 48,000 borrowers, 51% of whom were acquired directly through our mobile channels. We continue to invest in borrower acquisition by introducing new credit products and services and tailoring products to borrowers' specific needs. At the same time, we're working to maintain borrower acquisition efficiency as we continue to improve customer targeting and overall conversion rate. We remain focused in serving prime urban salary workers, with stable credit performance and steady income. To better serve our borrowers' credit needs, we're developing products and services that are tailored for specific consumption scenarios, including the purchase of secondhand cars, travel, and special elective medical procedures. We believe our end-to-end mobile lending solution ideally positions us to provide a great user experience for our internet-savvy borrowers as they chose between various financing options. We are also rolling out products that target repeat borrowers, as a number of existing borrowers are reaching the end of their current term. On the investor side, in Q4 we served over 117,000 investors, all of whom are acquired online. We see healthy repeat investment patterns from our existing investors, while we are also strategically focusing on acquiring new investors. Given strong investor demand and decreasing interest rates, we lowered return for our standard products in late Q3. We have also extended the investment lock-up period to better match loan tenors with investment periods, and maintain better liquidity management. Aside from individual investing, our strategy focuses on diversifying funding sources to include institutional investors. In October 2015, we established a business relationship with a trust, under which the trust extended loans in an aggregate amount of RMB250 million to borrowers on Yirendai's online marketplace. In Q1 2016, the original beneficiary of the trust has transferred its beneficiary rights in the trust to a special purpose vehicle, which has proposed to issue and list of RMB250 million ABS for trading on the Shenzhen Stock Exchange in China. 3 / 11
The proposed offering has been approved by the Shenzhen Stock Exchange. We believe the institutional sources could provide low-cost funding to our platform which allows us to offer even more competitive rate to high-quality borrowers. Risk management is always our core focus. Our strong credit performance, as demonstrated by our recent delinquency rate and vintage charge-off, highlights our strong risk management capability. Leveraging various data sources and years of internally-compiled risk performance data, we continue to fine-tune our risk-based pricing model to better price the customer's credit. We developed a new risk model, fast-track 2.0, based on new data sources such as UnionPay and online PBOC credit reports that have allowed us to serve more borrowers while maintaining a similar risk profile. We continue to explore new data sources, including more e-commerce data and social security data to optimize our credit screening and authorizing capability. We are also constantly monitoring overall economic trends and the credit performance to dynamically adjust our risk policy and model accordingly. We continue to invest in and upgrade our technology platform to scale up productivity, improve customer experience, and strengthen security and compliance measures. We have introduced new APIs to integrate into the platforms of our channel partners. The WeChatbased services we rolled out in Q4 allow users to conveniently borrow or lend through our WeChat service accounts without going to the website or mobile app. We're actively working with various partners in the Internet space to develop online consumer financing solutions leveraging their online data and traffic. Our IPO on the New York Stock Exchange has added significant brand value and credibility to our platform, and we continue to focus on developing products that provide a superior user experience to enhance the trust and the confidence that we have built in our brand. As we look into 2016, we'll continue to grow our user base and focus on providing our target customers with better products and services. We will focus on partnering with companies that service our target customers with consumption options. On the lender side, we will diversify our funding sources to maintain a good balance. We will continue to invest heavily in technology, especially mobile technology to strengthen our mobile leadership and provide our customers with the best possible online borrowing and lending experience. With that, I'll turn over to Dennis to discuss our financial results. Mr. Dennis Cong: Thanks, Yihan. Before going over our financial results for the fourth quarter and the full year of 2015, I'd like to echo what Ning and Yihan have said. We believe there are huge market opportunities in the China consumer financing market and we will take full advantage of the credibility our status as a listed company provide, and the regulatory environment to extend our leadership position and capture the enormous business opportunities ahead. Since this is our first earning call, I would like to quickly review a few key elements of our business model. Borrowers borrow directly from our investors on our online marketplace. 4 / 11
We primarily collect fees from two sources. First, transaction fees from borrowers are earned when a loan is originated. Second, services and management fees from investors are earned over the life of the investment. In 2015, we billed a total of US343 million in fees, an increase of 975% when compared with 2014. Transaction fees from borrowers accounted for 95% of total fees billed. With the fees billed, we mainly provide three services to our customers - loan origination services when the loan is originated, post-origination services, and risk reserve fund protection during servicing period. The post-origination services mainly include cash processing, account management, and collection services. For risk reserve fund services, the primary objectives are to help build Chinese investors' confidence and trust in Yirendai's products and to attract new investors, and retain existing investors on our platform. Specifically, we set aside a portion of the transaction fees we receive in the risk reserve fund, to recover the outstanding principal and accrued interest of default loans. In the near term, we have the intention to keep the risk reserve fund sufficient to cover the expected future payouts. The percentage ratio is currently set at 7% of the new loan origination volume, up from 6% in Q3 2015, to provide safe margin to absorb volatilities in our asset performance, as we have stated during our IPO. We do not expect this ratio to change in the near term, given our asset portfolio performance and credit policy. As Ning and Yihan mentioned, we had a solid fourth quarter with a strong growth of loan origination volume. In Q4, we continued to expand in the consumer finance market in a disciplined fashion. Our loans facilitated in Q4 reached a record of US510 million, up 189% year over year, and 27% on a sequential basis. Net revenue in Q4 was a record US71 million, an increase of 279% year over year and 21% on a sequential basis. This increase was primarily driven by two factors - the positive impact from growth of loan origination volume and the deferred revenue impact from the increase in percentage of cash set aside in the risk reserve fund from new loans. On the funding cost side, our 12-month Yidingying investment yield on our platform in Q4 is 9.3%, down from 10% in Q3, as we benefit from decreasing interest rate environment, as well as strong investor demand for high-quality assets on our platform. Now on to operating expenses. Sales and marketing expenses were US38 million for the quarter or 7% of loan volume origination, compared with 7% in Q3, as we continue to maintain customer acquisition efficiency through accurate customer targeting and conversion rate improvement. Origination and servicing costs were US6 million for the quarter or 9% of net revenue, compared to 7% in Q3, and the increase was mainly due to the expenses associated with the trust transaction. 5 / 11
Our G&A costs were US7 million for the quarter or 10% of net revenue, compared to 9% in Q3 due to an accrual of yearend bonus. In Q4, Yirendai generated EBITDA of over US20 million, compared to less than US6 million a year ago. Net income was US13 million in Q4, compared to US6 million a year ago, as we continue to grow our business at a sustainable profitable level. Looking at full year 2015, we achieved a great success on more precise risk pricing by developing a credit scoring system and introducing new products with different pricing grids. In 2014, almost 100% of loans facilitated through our platform were Grade A loans with an average transaction fee rate of 5.6%. At the end of 2014, we began introducing Grade B, C, and D with higher transaction fee rates. This diversification of products brought significant growth on the fees billed and did not impact our pace of growth. In 2015, 80.6% of our loans facilitated were product D with a 28.2% average transaction fee rate. And the product volume mix for product A, B and C were 9.1%, 4.4%, and 5.8% respectively, with transaction fees rate ranging from 5.6% to 26.4%. These new products resulted in a significant increase in revenue. More specifically, we recognized US204 million for loan origination services provided upfront and US4 million for post-origination services. We deferred US19 million for post-origination services for future periods and US108 million in fees billed associated with risk reserve fund were net presented in our income statement. Total net revenue recognized in 2015 were US209 million, an increase of 556% when compared with 2014. We achieved healthy level of profitability as we grew our business in 2015, with EBITDA hitting US64 million, compared with a negative US4 million in 2014. Net income for 2015 were US44 million with 21% net income margin, compared with a negative US4 million in 2014. Now on to the credit performance of our portfolio. The recent delinquency rate and vintage charge-off performance are well within our expectations, which demonstrate our capabilities in credit underwriting and risk management, which benefits from our enhanced risk data analytics, as well as comprehensive and effective credit scoring system. We expect to continue to see strong credit performance, as our 2015 vintages are performing to our expectations, and we expect 2016 vintages to continue that trend. Specifically, as of December 31st, 2015, the overall delinquency rate for loans that are 15 to 89 days past due was 1.3%, an improvement of 0.1 percentage point from 1.4% as of September 30th, 2015. The net charge-off for the first three quarter vintage loans of 2015, have shown positive trend as shown on page 26 of our earning release presentation uploaded on our IR website, a clear indication of our stable credit performance of all products in our loan portfolio. As of December 31st, 2015, the outstanding balance of liabilities from risk reserve fund guarantee is at 6.1% of total loan principle outstanding balance, up from 5.5% in Q3 2015. 6 / 11
We believe the risk reserve fund liability balance is sufficient to cover expected future payouts and do not plan to fund additional cash. We also intend to maintain the 7% cash reserve ratio in Q1 2016 with respect to the new loans originated. We expect the strong credit performance to continue as we further refine our risk pricing model, expand our product portfolio into high quality asset, and improve delinquency management. On the balance sheet side, we had a very healthy position of working capital and held an amount of US131 million in cash and cash equivalent. Aside from the cash position, we had US75 million in restricted cash in our risk reserve fund account and trust account. We also booked US34 million in loans at fair value as a result of consolidating the trust. Our liabilities were mainly comprised of two items - US84 million in liabilities from risk reserve fund guarantee and US39 million payable to fund at fair value as a result of consolidating the trust. Cash flows in 2015 were also very healthy. We generated US64 million in cash from operating activities, which was mainly generated from transaction fees charged to borrowers, US45 million used in investing activities, which was mainly related to investing in loans carried by trust, and US114 million provided by financing activities. With that, let me go over our guidance for the first year (sic - quarter - see prepared remarks) and full year 2016. Given the tremendous opportunity in the consumer finance market, the strength of Yirendai's brand and our expansion strategy on both the borrower and investor side, we expect that for the first quarter of 2016, loan origination volume will be in the range of US450 million to US460 million, net revenue in the range of US60 million to US65 million, and expect first quarter EBITDA to be in the range of US15 million to US16 million. For full year 2016, loan origination volume is expected to be in the range of US2.8 billion to US2.9 billion. Full-year net revenue is expected to be in the range from US400 million to US410 million, which results in an EBITDA ranging from US100 million to US105 million. That concludes my remarks. I'd now like to turn the call back to operator for the Q&A session. Questions and Answers Operator: Thank you. We will now begin the question-and-answer session. (Operator Instructions) At this time, we'll pause momentarily to assemble our roster. Richard [Shu] of Morgan Stanley. Richard Shu: Just have a quick question on actually the borrower acquisition side. We saw there's no notable increase in terms of borrower acquisition from online channels. So just wondering what's driving that. And looking forward, just wondering whether there's any development or plan to further extend the online acquisition channel for borrowers. And if there's any specific plan, could you share with us? Thank you very much. Ms. Yihan Fang: This is Yihan. Yes. The increase actually was within the range that we said, because we actually wanted to still trying new partnerships and different channels, and we tried more different mobile channels and established new partnerships. 7 / 11
And some of the channels, the efficiency was not great. And we further optimized our channel selection. That's why. But it's definitely within our budget. We have a range for our online acquisition budget. It's still within the range within our expectation. Mr. Dennis Cong: And maybe let me add a few more comments here. I think in terms of loan as, as well as far as a percentage, we do see an increase from Q3 to Q4. As Yihan mentioned, that will continue to drive our online acquisition strategy working with online channels. As we look into 2016, online channels will be our focus. As we believe when we target the consumer financing market, there's great opportunities for us to work with marketable online channels and partners to further expand our market opportunity. Richard Shu: Thank you very much. Operator: Dick Wei of Credit Suisse. Dick Wei: I got a couple of questions. Maybe first one, looking at your charge-off, yes, the [M3] charge-off curve from the presentation, it looks like a couple of the loans, particularly those in like late 2014, loans seem to have -- the charge-off rate, the accumulative charge-off has seen some decline or stabilization. I wonder what is the contributing factor to that? Is that more of a better collection or just the overall, maybe the loans, kind of like the, I guess delinquent environment is not as bad as before? Thanks. Mr. Dennis Cong: Yes. I think there's usually two factors. Definitely the major factor is the collection. And also, we do have some penalty fees after the collection sometime also contributing on the decreasing of the charge-off [carts]. Dick Wei: All right. I see. And then, I guess my second question is maybe towards the loan growth outlook for this year. How should I think about maybe between the loan size and maybe the customer number growth? How should we think about the trend going into this year? Mr. Dennis Cong: Okay. Maybe I'll take that question first. I think in terms of the different pricing grade loans, by the end of Q4, we have close to 85% in product D. And as we going forward into 2016, as we further refine our risk pricing model, and as we continue to expand our partnership online channels, we would expect an expansion of products in A, B, C, in terms of total volume mix. In terms of the average loan size online/offline, I think through 2015, we do see a trending up of our online loan average size from Q1 to Q4, as we refine our risk model, improve our risk policy, and have a better risk pricing. But we do expect that to be stable going forward, yes. Dick Wei: Okay. Got it. Great. My last question is on the trust that we set up. I wonder how would it help maybe the economics for the Company? And how should we see the Company going to grow in terms of the amount of trust that the Company will use going down the road? Thank you. Mr. Dennis Cong: Yes. I think the trust is a first attempt in terms of [strategy], diversifying the funding source, working with institutional investors. In terms of the trust itself, we do see about one percentage point, one to two percentage points saving in terms of the investor funding costs. And it is starting, as we announced in our press release, the 8 / 11
beneficiary of the trust has passed on the asset for ABS, asset-backed security transaction, and that's been approved for listing. So in the future, this will be a direction that we will take going work with institution, either through asset-backed security or working with traditional financial institutions to raise capital funding for lower cost and more stable, longer time funding source. Dick Wei: Right. Got it. So maybe the last question, just maybe circling back to the credit quality. I think there's quite a lot of concerns over the China macro situations. I understand that kind of the delinquency rate, like 30 days or like more (inaudible) rated, and we see much after impact or changes. But I don't know any [call it] general [recommends] on maybe the credit risk in China, maybe in terms of maybe approval rates, that need to be tighten it or any kind of risk regarding the China credit situation. Thank you very much. Mr. Dennis Cong: Yes. I think given the current macro and economic trends, and we -- from our target borrow base, who are urban salary workers, we see a very healthy trend of their income level, as well as their employment rate trend. So we do not see any change in terms of their credit performance. However, in our risk model and risk management practice, we do monitor all the micro factors, as well as all the credit performance of our each vintages, and with them dynamically leveraging all the data sources to refine, retune our risk model to make sure our credit performance are within our expectation. Dick Wei: Okay, great. Thank you very much for taking all the questions. Thank you. Mr. Dennis Cong: Yes. And then just add to that, I think one indication on page 26, you do see that for the first three quarters of 2015, you see a downward trend of our charge-off performance for each quarters. And then that's a clear indication of our current credit performance. Dick Wei: Right. Thank you, Dennis. Operator: Eric Wen of Blue Lotus. Eric Wen: Congratulations on the good quarter and guidance. I have two questions. First one is, as we know, [Baidu] is your IPO investor as from the (inaudible). Do they remain your investor? Do they remain a financial investor or you have other ways of collaboration going on with Baidu? And that's my first question. Thanks. Ms. Yihan Fang: Actually, this relationship is a lot more than the investment. Yes, we chose Baidu because there are so many opportunities to work with them. They have different properties, for example Baidu Wallet and other things they're working on. Currently we're working with them. We want to build together deep integration, utilizing our risk technology and underwriting capability together with Baidu's users and their data, a lot of data from Baidu to provide like custom-made lending products for Baidu customers. But this will take awhile. This is like a deep collaboration which will have good impact for both us and Baidu. We think it's a win-win situation. Eric Wen: Okay, great. My second question is, now, apparently, your stock has fallen lot since the IPO, unfortunately. I notice revenue is actually about half of the Lending Club, but your profit is much greater and, of course, your market cap is much less. 9 / 11
Can you explain why your profitability is so good? Do you have any plan to buy back your shares or even [privatize] in the near future? Thanks. Mr. Ning Tang: This is Ning. I think on the two countries, the U.S. and China, the two markets have different opportunities for marketplace companies, yes. I think for Lending Club and us, the take rate scenario is quite different. And the, yes, economics is quite different. And so in China, basically is a much bigger opportunity in our view. Like in the U.S., is about, yes, helping like credit card debtors actually reduce their debt burden, whereas, in China, it's about providing access to credit which was not available to mass population just a few years ago. So I think the business opportunity we have in China is different from what the Lending Club has. In terms of, you mentioned the stock price and also considerations like a buyback. And our view is that we continue to do good business and deliver results, and it's, yes, very solid, yes, company building process, which we believe should be reflected in value. Of course, we will consider all possibilities for long-term value creation. Eric Wen: Thanks very much. Very helpful. Operator: Tian Hou of TH Capital. Tian Hou: One of the question is just some information on the loans generated from offline channels. I wonder how much is that? And also, outstanding loan principal and how much is that in Q4? Mr. Dennis Cong: I think in terms of the loan volume in Q4, the offline, the loans from the offline channel is about 66% of the total loan volume originated in Q4 2015. And the total loan outstanding balance at end of Q4 2015, is about US1.4 billion total. It's about the similar percentage, around 66% or 67% of that loan outstanding balance are from offline channels. Tian Hou: Also, for the business you guys are in, is there a seasonality involved in such business? Mr. Dennis Cong: Yes. It usually goes with the holidays in China. Usually we see a slow seasonality in Chinese Spring Festival time, usually in February. So that's usually a Q1 slow season. And usually we see a stronger Q4 season as [towards the end] there are some more borrower needs. So that's usually the kind of seasonality that we see throughout the year. Tian Hou: So in terms of borrowers and or in terms of lenders, what's the -- creditor, what are the turn rate? Mr. Dennis Cong: I think in terms of borrowers right now, most of them are first-time borrowers. We haven't reached significant advance stage of borrower reaching the end, but we are seeing increasing numbers. In that [end], we are building out products to re-target these borrowers for newer loans. And that will start this year. And usually, from our experience, in terms of CreditEase platform, usually there's about 15% to 20% of the loan volume are coming from repeat borrowers. In terms of investors, we actually see very high [continues] and repeat rate. The repeat investment rate can be higher than 60%. And also, given that after our IPO we attracted large amount of investor on our platform, we actually see a lot of investors not being able to renew their investment when the previous investment has matured. 10 / 11
But we do see very strong demand and very high repeat rate from the investor side as well. Tian Hou: So when you say 7% reserve rate, I wonder why you set reserve rate at 7%, not higher, not lower. Mr. Dennis Cong: Yes. 7% is risk reserve ratio. It's coming from the estimation of the future payout, which is the potential defaults from the loan portfolios, including both the principal, as well as accrued interest for the portfolio that we intend to cover at the current stage. To cover that defaultrelated interest and principal, 7%, percentage of the loan [origination] volume equivalent cash will be sufficient from a cash flow point of view. Tian Hou: My last question, I understand Yirendai also has other business. And as a group, how other business and this loan business fit in together? Mr. Ning Tang: You must be asking about CreditEase. Actually, at CreditEase, other business lines we have experienced good growth and stable credit quality. Tian Hou: Thank you. That's all my questions. Operator: Showing no further questions, this concludes our question-and-answer session and conference call. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. 11 / 11