Hello ladies and gentlemen. Thank you for participating in the Third Quarter 2019 Earnings Conference Call for FinVolution Group, formally known as PPDAI Group Inc or Paipaidai. At this time, all participants are in listen-only mode. After management’s prepared remarks there will be a question-and-answer session.

[Operator Instructions] Today’s call is being recorded. I will now turn the call over to your host Mr. Jimmy Tan, Investor Relations for the Company. Jimmy, please go ahead..

Hello, everyone and welcome to third quarter 2019 earnings conference call. The Company’s 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 e-mail by visiting the IR section of our website at ir.ppdai.com. Mr.

Cliff Zhang our Chairman and Co-Chief Executive Officer; Mr. Feng Zhang, Co-Chief Executive Officer; and Mr. Simon Ho, 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 access our operating performance.

These non-GAAP financial measurements are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the 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 laws.

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 Chairman and Co-CEO, Cliff Zhang. Please go ahead sir..

Hello, everyone and thank you for joining our third quarter 2019 earnings conference call today. In third quarter, we continue to deliver healthy and solid results and transition or funding sources towards the institutions. Specifically, the proportion of loan originations facilitated by institution partners increased to 75% for the quarter.

More excitingly, our revenue transition in volume base has been achieved at the same time with continuous growth in low volume. In the third quarter, we achieved year-over-year and quarter-over-quarter loan volume growth of 66% and 14% respectively to RMB24.6 billion.

Consequently, for the first nine-months of 2019, our loan origination volume reached RMB65.3 billion, which has exceeded our loan origination model in a full-year 2018 of RMB61.5 billion. Our operating revenue increased by 35% year-over-year to RMB1.5 billion and our operating income increased by 32% year-over-year to RMB649 million.

Many of you may be aware that in our most recent Annual General Meeting, our shareholders approved the change of our name to FinVolution Group, and in Chinese [indiscernible]. Our ticker symbol will also be changed to FINV the 29th of November. Whilst the PPDAI brand will continue to be the main interface for our borrowers.

The rebranding of the group better reflect our diversified businesses, such as in providing technology, related services to our financial institutions partners, and our growing overseas businesses. The integration of finance and evolution, representing better alignment with the range of our businesses, our strategic development and our mission.

As a leader in a technology driven consumer finance space, we will remain focused on our strategies and maximize shareholder value by expanding our core business, enhancing our brand recognition and continuing to invest in technology. Now, I would like to pass the call over to our Co-CEO, Feng to discuss the outlook of our business..

Thank you, Cliff and hello, everyone. As Cliff mentioned, we have undergone a significant transition. In less than a year, our platform shifted from being mainly facilitated by individual investors to being predominantly facilitated by institutions.

To illustrate more details, in the year ago period, our institutional funding partners only facilitated around 14% of total loan origination. While looking at the third quarter of 2019, our institutional partners facilitated more than 35% of loan originations.

Notably since October, all of our loan origination are being facilitated by institutional partners. Today, the number of institutional partners active on our platform have increased to around 30. During this transition period, we have continued to deliver consistent performance.

Overall loan volume grew sequentially in each of the past four quarters with an average growth rate of 14% for each quarter. Our third quarter loan volume grew 66% year-over-year. Our revenues and operating income are both higher by over 30% versus a year ago period. And during this period, our delinquency rates have remained broadly stable.

Despite the ups and downs in the industry and the impact of the microeconomics slow down. Our transition has been rapid and smooth, and arguably one of the most successful in the P2P industry. This successful operational transformation demonstrates our internal extensive experience, strong execution and management capability.

This transition would not have been possible without our institutional partners. Their trust and support in us reflect our value proposition to them and further validates our core capabilities, our experience as well as our broad technology capabilities.

Today, we also announced that we are discontinuing the P2P mode of the business and going forward we will focus entirely on servicing and facilitating loans, partnering with financial institutions. Since we have started new loan origination is funded by individual P2P investors. Our P2P related loan balance will continue to shrink.

As evidenced by the monthly P2P loan balance figures disclosed on the NIFA website. Our P2P loan balance has already decreased by more than half from RMB19 billion at the end of June to RMB9 billion at the end of October. The loan tenure on our platform relatively short, on average eight to nine months.

So this loan balance will run off fairly quickly without any new originations. Based on the current run rate, our Q3 loan balance is expected to be completely run off in the first half of next year. We believe this run off process will be smooth. As a result of these measures, we have taken our exposure through to P2P lending is getting smaller.

Today, P2P contributes to zero of our new loan originations. As of October, P2P loans accounted for less than 30% of the total loan outstanding on our platform and this proportion will continue to fall. Industry and the regulatory developments in P2P lending therefore, largely have no influence on us anymore.

Fundamentally, the consumer finance market in China is vast and remains under penetrated and we are confident that with our experience and capabilities FinVolution Group is a well positioned to connect and facilitate individuals financing needs with banks and other financial institutions.

With that, I will now turn the call over to our CFO, Simon Ho, who will discuss our financial results for the quarter..

Thank you Feng and hello everyone. We are delighted with our performance, achieving solid operational and financial results in the third quarter as loan origination volume progressively increased, underscoring the strength of our markets and the growth trajectory of our business.

Non-GAAP adjusted operating income increased year-over-year by a solid 45% and our non-GAAP operating margin with an a healthy level of 43%. Our operating margin however, declined quarter-over-quarter. This is in-line with our expectation and was mainly due to the rapid shift in the funding mix on our platform towards institutions.

As we have discussed on our previous earnings calls, loans facilitated by institutional investors have somewhat lower margins than loans facilitated by individual investors.

Despite the significant transition we have been through on an absolute basis, our profitability remains very healthy with an operating margin of 43% and an annualized return on equity of 33% in the third quarter. Our balance sheet also remained solid with approximately RMB2.2 billion of cash and short-term liquidity.

Notably, our quality assurance fund remains sufficient with the total balance of RMB6 billion equivalent to 21% of the total outstanding loan principal and interest with quality assurance. Our results demonstrate the resilience of our business models and our ability to adapt to the changing regulatory end market dynamics.

Now, let me briefly go over the financial results for the third quarter, in the interest of time, I will not walk through each item line-by-line on this call. Please refer to our earnings release for more details.

Operating revenues for the third quarter of 2019 increased by 35% to approximately RMB1.5 billion from RMB1.1 billion in the same period of 2018, primarily due to the increase in loan facilitation service fees, post-facilitation service fees and interest income from loans invested mainly through the trusts.

Loan facilitation service fees increased by 26% to RMB894 million for the third quarter of 2019, from RMB708 million in the same period of 2018, primarily due to the increase in loan origination volume.

Post-facilitation service fees increased by 25% to RMB301 million for the third quarter of 2019, from RMB240 million in the same period of 2018, primarily due to the increase in loan origination volume and the rolling impact of differed transaction fees.

Net interest income and loan provision losses were an income of RMB265 million compared to an income of RMB16.1 million in the same period of 2018, mainly due to the increased interest income from the expansion and the outstanding loan balance as of consolidated trusts.

Non-GAAP adjusted operating income, which excludes share based compensation expenses before tax was RMB658 million for the third quarter of 2019, representing an increase of 45% from RMB454 million in the same period of 2018.

Other income was RMB80 million for the third quarter of 2019, compared with RMB251 million in the same period of 2018, primarily due to a lower gain from the quality assurance funds in the quarter. Net profit decreased by 7.9% to RMB599 million for the third quarter of 2019, from RMB650 million in the same period of 2018. Now, turning to guidance.

In the last quarter, we guided that we expected loan origination facilitated by institutional partners in the second half of 2019 to be in the range of RMB32 billion to RMB38 billion.

Having achieved RMB18.5 billion in loan originations facilitated by institutional partners in the third quarter, we now expect to be hitting the upper half of this guidance range. And for the fourth quarter, we therefore expect total loan origination volume to be in the range of RMB16 billion to RMB19 billion.

This represents a sequential decline in loan volume growth in the fourth quarter, but we expect this to be temporary, mainly due to the drag from our deliberate decision to sharply run down loan origination facilitated by individual P2P investors, which was still a quarter of our loan origination in the third quarter.

In addition, a smaller secondary factor is seasonality, that the fourth quarter traditionally is a tight liquidity period for our institutional partners, such as commercial banks that have to meet certain liquidity ratios at the end of the year.

We are fully confident that this is only a temporary slowdown, and that volumes will recover in the New Year. Our institutional partner pipeline remains solid, and we are presently in active discussions with over 10 potential new partners. Looking forward, our strategy remains committed to and focused on consumer finance.

The market in China is vast and under penetrated. On the other hand, the demand from financial institutions for our services is also huge and growing. Our core capabilities position us well to facilitate borrowers and financial institutions and enjoy the benefits of this vast opportunity.

We are focused on deepening our cooperation of financial institutions, leveraging on our extensive experience and proprietary technology. We are also committed to our international expansion with our initial focus on Southeast Asia. With that, I will conclude my prepared remarks. And we will now open the call to questions. Operator, please continue..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Sanjay Sakhrani of KBW..

Hi, this is actually Steven Kwok filling in for Sanjay. My first question is just around management's commentary around the expansion overseas and also providing technology to financial institutions. Can you guys elaborate on that? And overtime, how should we expect that to ramp up and the impact on the P&L? Thanks..

Sure. On the international front, we started operating in Indonesia since the beginning of this year and we have recently applied to become a fully licensed P2P lender under Indonesian regulations and we hope to have a favorable results before the end of the year. So the business is young, we definitely report back with further updates going forward.

Philippines is another market, we have started operating recently as well and we are also looking into other Asian markets, such as in India and in Vietnam as well. With regards to financial institutions, this is pretty much an extension of the work we are doing on the funding side.

We are partnering with many licensed financial institutions for the - obviously to help loan facilitation and the platform. At the same time, many of them are deficient or do not have the full suite of capabilities for consumer financing.

We are also in there to help them to build their own capabilities and whether it is risk management, serving some loans for detection. And we are going into work with them to implement these capabilities in-house. So this is a big part of our strategy going forward to work more deeply and closely with financial institutions.

Does that answer your question?.

Yes, it does. And as a follow-up just around the revenue yield, you talked about how the decline is attributable to moving more to institutional side.

Should we expect this to be the run rate going forward? Or are there are any further impacts giving that your funding still had a component of the retail side in the third quarter?.

Yes. So, obviously our loan volume grew sequentially by 14%, revenues softened a little declining by about 3% quarter-on-quarter.

This is really a direct reflection of the lower margin, lower take rate of the loans facilitated by the institutions and also the rapid ramp up in institutional funds to third quarter from 45% to 75% of total volume from Q2 to Q3.

I do think, I think most of the take rate decline is behind us, and Q3 I would think is a good reflection of our take rate revenue margins since our platform was already majority funded by institutions in the third quarter..

Right. Thanks for taking my questions..

Thanks, Steven..

[Operator Instructions] The next question comes from Yiran Zhong of Credit Suisse. Please go ahead..

Hi. Thank you management for taking my questions and congratulations on your latest transformation. And just have a few question on the latest institutional funding partners. Can you please provide the latest update on the current partners that we are working with? How many currently 3Q versus 2Q.

And any changes in this slip between the banks and other types of institutions. And secondly, what is the customer acquisition cost in the 3Q. And how is the trend looking so far in Q4. And also finally in the 3Q the fair value changes from financial guaranteed derivative 43 million.

Wonder what is driving that number?.

Sure. Thanks Yiran. I will first address the institutional funding breakdown. There has been a continued shift towards working with banks and consumer finance companies, presently we are roughly in terms of loan volume about 80% of our lending volume, loan origination volume is being facilitated by banks and consumer finance companies.

The trust are roughly about 15% and other financial institutional would be roughly about 5%. So, we have continued to shift further towards working with banks and consumer finance companies. I would think that we are now at more of a steady state in terms of proportions and probably wouldn’t expect to see significant shifts from here in the near-term.

The banks that we work with and this is a common question, they are primarily midsize banks and city commercial banks that continues to be the case from previous quarters.

The number of the financial institutions that we partner with, I believe in the previous quarter, we said it was over 20 and I think that was a comment we made in the last quarter and this quarter, we said it is about 30 institutional partners that we work with actively, and we have a good pipeline of another 10 that we are actively in discussions with.

With regards to customer acquisition cost, the customer acquisition cost per successful borrower, first it is per new borrower, successful new borrower was around RMB220 in the third quarter. In the previous quarter, this was about RMB190.

And the increase was expected and we guided for this and the previous quarter, because there has been an ongoing shift in the mix of new borrowers towards the higher quality, higher credit quality segments which we are targeting. And this segment has somewhat higher acquisition costs.

Now looking into the fourth quarter and looking at the trends that we see at the moment, I think this acquisition cost per new borrower should be relatively broadly stable in the fourth quarter. We are not seeing huge pressures at the moment. And finally, your question on the fair value changes that are in our P&L and income statement.

I think the way to look at it, there are more numbers around this in the third quarter.

So there was a realized loss from financial guarantee derivatives of 37 million, and there is a fair value of loss of 43 million in the fair value change of financial guidance derivatives, you really should be looking at these two line items together and matching it off.

The financial guarantee derivatives if you go back in time and memory, these relate to a second investor protection reserve fund that we used to run is called the investor reserve fund. And we discontinued this at the end of 2017.

So what you are seeing these is the gradual maturity of these investment programs that this IRF, this Investor Reserve Fund was protecting.

And during the quarter, there was more maturities happening and hence you see slightly larger numbers, but you really should be looking at a net basis and on a net basis, you will see that the number has been - the net result hasn't changed much versus previous quarters.

I could walk through over this with you in further details separately, if you are interested..

Sure. Thank you..

[Operator Instructions] The next question comes from Alex Ye of UBS..

H, thanks for taking my questions. I have a few simple questions. The first one is on your long tenure. So, you have continued to kind of repeat to a bit more than eight month, so just wondering you said at a deliberate strategy we are taking and how should we expect this to go forward and second is on more acquisition.

So we have mentioned that our per acquisition cost has increased as expected, because we are moving toward the higher quality customers. And going forward who should we expect it to trend on your customer acquisitions. So if we are moving further towards the higher quality of course, or are we comfortable with the current segment? That is number two.

And probably just would like to have an update on your share repurchase scheme, and would be great to have your thoughts about capital return plan regarding dividends and share repurchase scheme? Thanks..

Okay. Thanks, Alex. Yes, the low tenure shortened slightly to the lower end of eight to nine months, I mean, the low end of that range. It is not as deliberate strategic shift, it is mainly because certain financial institutions that we partner with their preference is of the shorter tenure.

So it is really driven by the preference by some of the institutional partner that we are working with. With regards to your question on customer and acquisition costs, the trends and the segment we are working with. Yes, we do have plans, obviously in the coming year to further expand towards or the even better credit quality segments.

And the customer acquisition costs will obviously shift as well in that regards. In the near-term, though, we don't see much pressure in what we are doing. But there may be some shift as we go into 2020.

And, but bearing in mind, as you work with the different segments, you are dealing with different profiles, different ticket sizes, potentially different credit - better credit risks. So I think you really have to look at the whole package in totality at the end of the day. And finally, your question on share buybacks and capital management.

We still have an outstanding buyback quota of US$51 million. And we will continue to approach our buybacks opportunistically and we will take into account, of course our operational needs. Given that there is a certain degree of capital intensity dealing with the institutionally facilitated model that we are running at this moment.

In terms of dividends, our stands on this is the same as in previous quarters that it is into our intention to pay dividends each year. But of course, this is subject to review at the end of the day by the Board. And we will also take into account of the capital needs that we have in our business model. So that remains unchanged..

Yes. That is very helpful. Thank you..

[Operator Instructions] The next question comes from John Cai of Morgan Stanley. Please go ahead..

Hi, thanks management for taking my questions. I dropped off accidently previously, so I’m not sure it is just repetitive questions. But I would like to have [indiscernible]. So what portion of the revenue is contributed by [indiscernible]. And, if possible, can management provide them bottom end of 3Q and what has made this number always off balance.

And also on the risk, so I think that our risk performance is stable. So against the secular trend something as conversions rates and our own transitions is actually going - found risk of borrower. So, is there encounter behind call it stable performance is that a net, net results or how should we understand that.

And related question is our current customer base, if we need to compare them with like two quarters ago and our funding mostly P2P. Do we see significant change of our borrower base or maybe outstanding loan per borrower has changed significantly when we transitioned to more institutional funding. Thank you very much..

Yes. John thanks for your questions. Regarding your first question, revenue breakdown, you can see it clearly from our income statement, the contribution from trusts that is the net interest income and provisions, loan loss provision items on the revenue side.

But for the loan facilitation post facilitation fees, I think I would encourage the market investors to look at it into totality, because in the last quarter we were pretty much predominantly driven by institutional funding partners.

And as we said previously, that sort of the takeaway dynamics that we saw in the third quarter is in our view probably a pretty good reflection of what it will look like going forward. So, I think we are pretty comfortable with what we see in that front.

The loan outstanding balance as of the end of the third quarter was RMB35 billion and the outlook of this it clearly I think fourth quarter we may see some softening as we have guided to loan originations volume, total loan origination volume in the fourth quarter will be a little bit soft for temporary reasons.

And at the time, because we are also running off the P2P loan balance obviously still quite rapidly. So, that will be a near-term drag as well. But we are confident I mean pass the stage is transition period that is coming to an end. We could deliver healthy growth going forward.

Your next question is around credit risk delinquencies and you have noted that delinquencies were generally stable in the third quarter and continue to perform within our expected range.

In the short-term in the fourth quarter, there could be some small upward pressure mainly on the back of the tightening of loan collection and data practices across the industry.

But overall we believe this is manageable and we expect our delinquency rates as you mentioned to be structurally improving due to our shift towards a better quality borrower segment relative to the past. So, I think structurally the direction is still for improvement.

Although in the fourth quarter, I mean there is a obviously a bit of pressure from what is happening in the industry.

And finally with respect to the outstanding loan per borrower, I don’t think we have seen significant shifts, this segment we maybe first time borrowers, we are lending slightly larger than before, but I think in broad terms no significant difference from previously.

Does that answer your question John?.

Yes. So, on the overall borrower base so now we have predominantly funded by institutions, but the borrower let say overlap with our historical borrower base, which is mostly funded on entity is that we see a significant change of the borrower base or composition..

There is some overlaps, but we are also adding on new borrowers, so it is a combination of both. I don't have specific numbers in front of me, but it is both. As you can see, we are acquiring new customers in the market and these are obviously the target segment that we are working on..

Thank you..

Thanks John..

[Operator Instructions] The next question comes from Jacky Zuo of China Renaissance. Please go ahead..

Hi Simon, thanks for taking my question. Actually just a follow-up on John's questions regarding to the borrowers, as we actually moving into better quality borrowers, just want to get some evidence because previously, we actually provided a breakdown of our borrowers in terms of different risk levels.

According to our risk management system, I just want to get a roughly breakdown of the change of the lower risk borrowers in the recent quarters. And I think related question is, in terms borrower acquisition channels what has been the change in the process when we move into better quality borrowers, that would be very helpful. Thank you..

Sure, Jacky. I think you are right. There has been a significant up shift in the credit ratings of our borrowers.

Previously, as you all know, we have seven levels or seven credit ratings for approved borrowers, levels one to level seven, where one is the highest quality and the seven is the lowest or the lower quality, it is a higher delinquency rates and that is a better characterization. One is low delinquency rates, seven is the highest.

Previously, I think, if you look back 18-months, 24-months ago, we were primarily lending operating in sort of the levels maybe four and five, six, that sort of the bell curve, the concentration. Currently I think we are mainly servicing segments two, three, four is the vast majority of our loan origination today.

So there has been a sizable significant shift in that mix.

And sorry, Jackie, I missed the last part of your question, would you mind repeating it?.

Yes, it is about the borrower acquisitions channels. So what type of changes - we want to acquire better quality customers. Thanks..

Yes. So the channels obviously have shift to somewhat and to reach sort of our target segment of borrowers, we have shifted towards using more, putting on more advertising on social media channels such as using the WeChat, More. Our app stores have also been a very key significant channel for us as well.

So we have shifted towards using more social media types of channels as a result..

Got it. Very clear. Thank you..

[Operator Instructions]. As there are no further questions now. I would like to turn the call back over to Jimmy Tan for closing remarks..

Thank you once again for joining us today. If you have further questions, please feel free to contact PPDAI Investor Relations through the contact information provided on our website or in our press release..

This concludes the conference call. You may now disconnect your line. Thank you..