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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2021 - Q1
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Operator

Good day and thank you for standing by. Welcome to OneConnect First Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would like to hand the conference over to your speaker today, speaker Patricia Cheng. Please go ahead..

Patricia Cheng

Hello everyone. Great to speak to you again. Welcome to the Q1 earnings call. On the line we've got Mr. Ye Wangchun, our Chairman and CEO on OneConnect; Luo Yongtao, CFO; Mr. Michael Fei, CEO of SME Banking; and Mr. CEO of Gamma O..

Ye Wangchun

Hello everyone. I'm pleased to say that OneConnect has gone off to a solid start to the year, riding the cocktail of the economic recovery in China as well as the continuing demand for digital solutions from financial institutions.

We achieved revenue growth of 41.1% year-over-year as we build on the momentum from the rollout of cloud services platform last year, which more than offset the gap from the exit of low-hanging products.

Even though the drop in business origination widened following industry and the regulatory headwinds, revenue mix from third-party customers rebounded for two consecutive quarters. Net loss also further improved with net loss ratio narrowing by 34 percentage points, thanks to the strengthening of product management and continuous cost difference.

Further progress was made in customer expansion. In the first quarter, we signed over 20 deals worth more than RMB 5 million, three of which exceeded RMB 10 million. The contract spend is significantly higher than average.

From the -- financial institutions issued a total digitalization of retail banking business to building a digital bank from scratch. This project reflects our all round coverage of our clients diverse needs and are a great testament to our technology plus business capability.

In the coming quarter, OneConnect remains committed to strengthening product value as well as customer value. We will continue to upgrade our products and enhance the end-to-end certainly to improve the core competitiveness of our offering. For more mature product, we will further broaden the customer reach and volume.

For newly launched ones, we will step up sales to third party customers..

Patricia Cheng

Thank you, Ye. Next, CFO, Luo Yongtao will go through the financial results in more detail. Luo, please..

Luo Yongtao

Yes. Thank you, Patricia. Good morning, everyone. This is my first results briefing. It's honour to speak to you, and present our results. The first quarter as Chairman, Ye said in his opening speech was a period of consolidation during which we continued with our strategy to reinforce products and the sales.

Starting with the top line, revenue increased by 41.1% year-over-year to RMB 820 million in the first quarter. Transaction activities provide a good snapshot of our business. Our revenue is driven by transactions or usage of our solutions. There are three main indicators that we look at; retail loan volume, SME loan volume and auto claims.

Retail loan processed by our system rose 11% year-to-year to RMB14 billion, reversing from a drop in previous quarters. Thanks to a pickup in risk management solutions, which I'm going to talk about in a bit. SME loans processed also posted an increase, up by 25% to RMB7 billion. The number of auto claims processed rose 56% to RMB1.56 million.

You have all seen the impressive GDP growth China reported in the first quarter. Although, the situation surrounding COVID-19 remains fluid, and there are some up and downs in different sectors. The recovery of the domestic economy is generally underway. Improvements in transaction activities will further drive our business.

By business segment, the cloud services platform was the biggest driver of revenues, contributing RMB181 million or 22% of the total revenue generated. The business was launched at the end of a second quarter last year, which means that we are unable to make a year-over-year consideration at the stage.

Our rapid growth shows OneConnect’s ability to break into new markets, just like five years ago, when we established the company. In terms of size, operation support was a biggest. Revenue rose 29% to RMB212 million, representing 26% of the total. Roadside assistance and AI customer service continue to see strong demand from financial institutions.

Risk management also did well, owing 21% to RMB99 million..

Michael Fei

Thank you, Wangchun. Hi, everyone. If you have the presentation in front of you, actually, we have a second section talking about the business highlights. We have several case examples of our product and content examples that we'll go through one by one together with you.

The first one, our major drive for our revenue this quarter with cloud service platform. Our cloud is actually designed specifically to cater to the needs of financial institutions. Security, safety and compliance are the most important considerations for financial institutions. And also the key differentiating factor for our financial services.

On this page you can see the Cloud example as a Joint Stock Bank. 95% of the test environment and the 30% of the production environment are now already on Cloud. As a result, the bank is able to deliver results much faster with more flexibility and also at a much lower cost.

We had several successful third party cloud signings on cloud services since the beginning of the year. Next page is a example, by another Joist Stock Bank. We have implemented a corporate banking risk control platform for that bank. It covers over 80,000 of its corporate banking customers and over 70% of its corporate loan portfolio.

We help the bank consolidate over 20 types of various internal and external data to develop 80 plus labels. We also offer a model platform and new ending. We help the bank develop over 600 early warning signals -- early warning rules. Many of these rules are based on our understanding of the business.

This is a testimonial of our business and technology capability. The bank is now using this platform as the whole credit process from pre-lending customer profile to risk awaiting to post loan management, or even collection. We are actively replicating this product to other banks in China..

Patricia Cheng

Thank you, Michael. Operator, we are ready for questions.

Can you please open the line?.

Operator

Thank you presenters. Our first question comes from the line of Yang Liu with Morgan Stanley. Your line is open..

Yang Liu

Thank you for the opportunity to ask question, and congratulations on strong top line growth. I have two questions here. First one is growth margin, because we saw meaningful business mix change no matter from a year-on-year and Q-on-Q perspective.

We see the business of origination part and low margin implementation part decrease, but the gross margin still largely flattish. So could you please update us what's your progress so far? I think the company is cutting some low margin business internally.

But why from the reporting gross margin perspective we can -- the positive impact is still not visible so far.

And especially we see the cloud platform is growing super fast, is that a still very low margin business at the current stage?.

Patricia Cheng

Thank you Liu Yang. Our CFO, Luo Yongtao is going to take both of your questions..

Luo Yongtao

Okay. Yes. Thank you for the question. I think I will probably combine your first one and the second one together, because they are related. The gross margin, yes, from year-to-year basis is from 34.8 to 34%. It's been about 0.8%. But on year-to-year basis is a result of the mix of our business.

Just as you said, we launched the product optimization in 2019. And the intensity of the action actually was stepped up in the middle of last year. That one impact is gradually, we will see it.

But we compare this quarter and last quarter, Q1 last year, the major change is a cloud production, because in last year, we didn't have the cloud business service. And this year, the cloud production is to 22% of the total revenue. For the cloud services platform as a new launches in the early stage, the gross margin cannot be very high.

So at this stage, it didn't contribute too much to improve the metric. Actually, I think it's better to look at this metric on quarter-on-quarter basis, because from Q4 last year to Q1 this year, the production of the business is similar or comparable, because in Q4, the cloud service platform is about 18% and this year is 22%.

From Q4 to Q1, on the SRS basis is 34.2% to 34%. So I would say it's in pretty same level. But there is also another consideration when we have to look at it because the gross margin on the numerator, we -- amortization of the intangible assets, it's a pretty flat number, actually across four quarters.

But on the denominator, the revenue have some seasonality in Q4 is much higher than Q1 from the number we can see it's about 30% higher than the Q1 numbers. So if we exclude this impact, then we better look at the non-IFRS basis. So that's why on our slide we compare the quarter-to-quarter variation based on the non-IFRS basis is from 42.82% to 43.5%.

So that's we can see it's a rebound from the Q1. And I think with ongoing our production optimization and the gross margin improvement in the new launches, where we will see the trend of the improvement of the gross margins going forward.

So the third one can you repeat the question, please?.

Yang Liu

Oh.

The question is we see the OpEx, sales and marketing, R&D, G&A increase, it's just a single-digit by the first quarter, do you think that this kind of growth is sustainable? Or, is there any way of return to lead to a relatively good cost control in first quarter?.

Luo Yongtao

Yes. For the operating expenses, we have with more and more revenue, the skill we will be building actually will lead to the operating leverage. We will see operating expenses will go down further, actually. And some one-time input will be lower-and-lower in the next quarters..

Yang Liu

Yes. Thank you. I have quick follow-up. Sorry, I have quick follow-up ….

Luo Yongtao

Yes. Go ahead..

Yang Liu

I think as you mentioned to use of non-IFRS metric, gross margin and also mentioned about the pretty good cost control or the R&D OpEx control, I just want to make sure there's no change to company's R&D capitalization policy..

Luo Yongtao

No, no, no. We don't have any changes on this policy..

Yang Liu

Yes. Thank you, thank you..

Michael Fei

Yes, thank you. Actually, I want to also provide more information, more insight on the question you just mentioned on the margin, you have pointed out and also Mr. Ye said, we faced out some business organization vendors product in the past two years. But in the meantime, we also launched the many new products, called just a one example.

As we have explained in today's briefing, I have explained four examples, in addition to car, we also have this risk of -- corporate risk of banking, risk management platform, the retail banking, also the digital banking in a box. These are all many of them are actually new products we have launched after our IPO.

And so all those SaaS products in the earliest stage, a lot of the standardization work is required. So that's the margin tend to be lower for this new product. But as we build more concrete examples, the cost will go down, and the margin will gradually improve. So I think that also is one reason why you see our margin is relatively stable..

Yang Liu

Thank you..

Patricia Cheng

Thank you, Liu Yang. Operator, we can go to the next question..

Operator

Your next question comes from the line of Hans Chung with KeyBanc. Your line is open..

Hans Chung

Thank you for taking my correction. So good morning, management team. So I have three questions. First, if we look at the retail loans versus the business origination revenue, and I know, we have been went through -- going through some optimization in our product portfolio.

So -- but we actually see, for the past few quarter, we saw a decline in retail loan year-over-year and now -- and we also see the decline in business origination revenue. There seems to be a directionality related.

And -- but in the quarter in the Q1, we have seen growth in retail loans, while we have the -- even larger decline in business origination revenue. So just want to know, how do we reconcile the trend underlying and then -- and so that’s my first question.

And then second question, just -- I will assume that now cloud revenue -- majority of cloud revenue is from Ping An customers. And then -- so if I subtract the cloud revenue from our revenue from Ping An group, then it seems like grew about roughly low teens year-over-year and then down nearly 40% sequentially. And it seems like larger than before.

And then considering we have a lower base for first quarter last year. So just want to know, is there any color you can provide to help us understand like the dynamic in Q1 for our Ping An Group, the single customer. And that's second question.

Third question is, I remember that last time we have revenue outlook for the full year to be no less than last year, which will be 42% year-over-year growth. So -- and now we have -- for Q1, we have slightly lower, which is 41%.

And -- are we continuing to maintain our guidance for revenue outlook for this year, 42%? And if so, that would imply growth with acceleration afterwards. And then -- and what will be the driver for that. Thank you..

Michael Fei

Thank you, Hans. So three questions. The first, the first one, let’s have --.

Luo Yongtao

I will take the first one and Wangchun will take the second and third one, I think..

Michael Fei

Okay. Yes, let's do it this way. Thank you..

Luo Yongtao

Yes. Hi, Hans. Yes. Very good question. You spotted the growth in retail loan volume with but the drop in our nation revenue. Well, the answer is actually quite simple is that, because we have a -- we have a shift in the loan portfolio we serve.

So actually, before 2019, many of the loans we serve are those consumer lendings without any collateral security. So the margin tend to be much higher for these type of loan services. But now, I think, our portfolio has been shifting to those more collateralized lending, the mortgages, car loans, etc.

The net interest margin for these products is much lower compared with consumer credit. And that also our service fee is much lower. So that explains why we have growth in the volume, but in the meantime, a drop in the revenue..

Ye Wangchun

On the second question, in the first quarter, the main driver is coming from the cloud services platform. But if we separate out the cloud, other business growth is about in the 10 percentage.

But I think for Ping An we should look at as a whole customer because the business coming from one single customer -- we have some agreement between OneConnect and Ping An.

Also for Ping An there is a impact from the product optimization for the business origination line because we have also business with the Ping An flowing to this line of business line.

The -- actually, if we excluding the cloud, the other segments aside from the business elimination is still growing that is more than offsetting the decline in the business origination.

And also, I think, the -- for the Ping An with the improvement in the business origination, I think, the income, the growth will be coming back, actually or it's a maintain the similar pace..

Luo Yongtao

Yes. Just to – has just to add on to the Ping An question. I think we should treat the Ping An the same as other client, yes. I don't suggest we actually strip out the cloud because we launched a new product for Ping An also we phased out old product. So I would suggest we look at the Ping An revenue as a whole, yes.

Cloud is just one of the new products we provide to Ping An group. There's another bunch of a new product we provide to Ping An Group too, yes.

So we just treated as a whole we have a new product and we phase out older product and we are confident that our services with Ping An will be a long time will continue to grow our support to the Ping An group..

Hans Chung

So can I correct -- so we have to say, yes, we rent out new product and phase out old product.

And so the rationale behind the phase out is because of low margin low value, just as we have seen in the overall the business origination segment, right?.

Ye Wangchun

Yes. You can say that..

Hans Chung

Okay. Okay..

Ye Wangchun

On the third question, I think, yes, in the Q1 the increase is about 41%. But looking for looking for the full year, actually, yes -- yes, I think, we will continue our product optimization. We will have for -- have more efforts in the sales. So we are confident that for the full year, we our revenue growth will be more than last year's rate.

Thank you..

Hans Chung

Okay. Okay.

Can I have one more question?.

Patricia Cheng

Yes, please go ahead..

Hans Chung

Yes, thank you. Thank you. I just wanted to ask about what's the implication from the launch of the digital currency by the Central Bank. And -- because I think, for PVC, they seem to adopt that hybrid model, which is traditional centralized database versus decentralized ledger technology.

And -- so I just want to know, like is there any trend like -- or is there any rationale for the commercial banks, they may adopt the DLT -- I mean as opposed to the current legacy infrastructure? And is that something that we can benefit from the trend? Just -- maybe just want to hear any color about the overall implication from digital Renminbi? That will be helpful..

Patricia Cheng

Thank you. Michael is going to share his thought..

Michael Fei

Thanks Hans. We are actually very closely monitoring the situation. We maintain a very close interaction with the Central Bank to understand the progress. At the current stage, we see -- at the most -- the Big Four, the big ones, piloting this digital new currency.

We are monitoring situation to see when there will be a larger scale rollout of this digital currency application and once I think it is a kind of a road out, the largest built definitely, there will be a lot of the requirement from those banks and other -- also the merchants to upgrade their payment infrastructure..

Hans Chung

Okay so, so--.

Patricia Cheng

Thank you.

Operator?.

Hans Chung

Okay. Thank you..

Patricia Cheng

Yes, Hans, we can continue offline on this topic Operator, let's have the next question..

Operator

The next question comes from the line of Ethan Wang with CLSA. Your line is open..

Ethan Wang

Hello management. Thank you for the presentation and thank you for presenting us with two examples of your cloud services. That is helpful. But just want to have more color on the cloud services. Can management share the current split of the revenue source from playing good versus third-parties.

We believe group accounts for majority, but can we get -- maybe some members on that? That is first question. And a second question. So, we understand that OneConnect served financial institutions, but is there any plan or are we doing actually that to serve the government as well, is there any accuracy here? Thank you..

Patricia Cheng

Thank you, Ethan. Why don't we ask because he's the in charge of the cloud business to talk about our cloud strategy to give you some better idea. And then the second question about the government business, Michael, would take it..

Unidentified Company Speaker

Okay. .

Patricia Cheng

Thank you. I would like to firstly answer your first question. Last year when we launched the cloud services platform, most of our customers are from Ping An Group.

However, for the first quarter this year, we’re adding more and more third party customers, including financial holding companies, insurance companies, and the financial companies at the provincial level. For these financial company deals that we signed, most of them are over RMB10 million.

So, we are confident that the number will surpass that Ping An Group..

Michael Fei

All right. And the second question about serving the government, yes, we do serve government agencies. But we are very targeted, we are very targeted. We actually see government as a part of the ecosystem of us to providing financial technology services to the banks and the insurance companies. I will give you one example.

Last year, we actually launched the SME financing platform together with the Guangdong provincial government. The platform integrated over 200 of different data sources from various government departments. And we use this data.

We use this information to bet -- to build credit profiles, to build a customer -- customer ratings, to help banks to do better SME risk assessment. And also with average on this platform to penetrate into many of the scenarios of SME financing, for example, Supply Chain Finance, Invoice Finance, et cetera.

So, we will continue at 3Q this to replicate this model to other areas in China. In fact, we have several more findings with this provincial government starting from the early this year. So the short answer is yes, we do see government agencies as one of our target customer, but we are very targeted.

We tried to build an ecosystem for financial technology services and help the financial institutions to grow their business..

Ethan Wang

Got it. Thank you. Maybe just a very quick follow-up on this front, because we've seen headlines surrounding our SBI JV with SBI in Japan since that's been terminated, and SBI even quoted, like some political issues surrounding that.

So, do we have in common than -- I know the financial impact is limited? But how will this impact our overall strategy of growing overseas in the future? Thank you..

Michael Fei

Yes. Well, thanks for noticing this news. As you said, the financial impact will be very limited. I think the JV, there's a success cases. There are failure cases. Yes, just the unfortunately, the JV with SBI in Japan, didn't work out for the past year and probably because of the COVID or various other situations.

So I think we mutually decided to close the JV. But our cooperation with SBI will continue to remain a major shareholder for us. They're committed to the company and we had a lot of cooperation’s outside of Japan, in Southeast Asia, Hong Kong et cetera..

Ethan Wang

Got it. Thank you..

Patricia Cheng

Thank you, operator. We can have the next question..

Operator

The next question comes from the line of Elsie Cheng with Goldman Sachs Your line is open..

Elsie Cheng

Good morning, management. Thank you for taking my questions. And I have two questions. First one is just to follow up on the loan businesses. We do see a very nice growth recovery into the first quarter.

I am just wondering for the next few quarters into this year, can we expect a sort of a similar trend, where we can have a growth recovery continuously, to be higher into the year. And then a follow up question on previously mentioned about retail loan business mix.

In terms of secured and unsecured lending, do you have an idea like what's the historical level and what is it now and into the next few quarters? How it will actually change? Then the second question is more on the business update.

Like based on some of this previous discussion, I just want to follow up a bit more on the cloud side, whether the customer numbers are not in terms of the revenue, as revenue contributions from third-party customers are small but in terms of customer numbers, you know, what is the current level for the cloud business, specifically.

And the second thing here is about our overseas revenue contribution. We have seen a lot of developments in the Southeast Asia for our oversea businesses. So just want to have an update on the revenue contribution from the segment. Thank you very much..

Patricia Cheng

Thank you, Elsie. Michael is going to take your questions related to our lending solutions, and then a second one about a cloud business, we go to Wangchun and then finally CFO will take – will talk about the overseas revenue..

Michael Fei

So just very quickly to translate. I think for the One service logon, this is one of the key KPIs for our different opinions as we monitor this growth of the volume actually month-by-month and also we hope that the trend will continue to recover as versus of mix, change of One mix. Unfortunately, we don't have the information on hand.

We will come back to you later, if we have this information..

Ye Wangchun

For the cloud services platform, altogether we now have 38 customers, eight of which are from Ping An Group, whereas 30 are third party customers..

Luo Yongtao

I would also like to give you more colours on why we are seeing bigger market shares from -- in financial clouds. Firstly, since we started building financial cloud in 2019, and we've been seeing a clear trend in regulatory and policy environment. The government is laying out more clear policies. And secondly is on technology.

For many years, big technology companies have been developing public cloud and they are leading in this area, whereas, for financial cloud, all of us are newcomers and Ping An as an experienced group, we are -- we have leading technologies in financial cloud.

And third is our strategy, when we are marketing, we focus on big customers, and we packed cloud service with other products of OneConnect. We target -- we specifically target commercial -- city commercial banks and financial holding companies and sell them a whole bundle.

In addition, financial cloud is also the basis of technologies and products for OneConnect, altogether this is why we have been able to secure bigger market shares starting from this year..

Michael Fei

Okay. I’ll cover the spirit question. So the progress on the overseas business, so far we have entered the 20 overseas markets, so far, mainly in Southeast Asia, such as Indonesia, Malaysia, Singapore and Cambodia. And so far, we have about over 100 customers already.

And on this scope, we -- our solutions include like risk management, fast claims, and the banking system. Also, we launched our VP in Hong Kong last year, as probably you have know that, it’s one of the eight VP in Hong Kong. But I think our strategy is a little bit different from others.

We mainly provide the online banking services for the SME customers. So it's also in line with our overall objective to support SMEs.

In terms of the production of the revenue, the revenue coming from overseas is still a small, it’s still in the low single digit so far, but with the progress, I think we will see more and more weighting coming from the overseas revenue. Thank you..

Patricia Cheng

Thank you, Elsie.

Operator, do we have anyone else on the line?.

Operator

We do have one more question from the line of Alex Yao with JPMorgan. Your line is open..

Alex Yao

Thank you management for taking my question. I just have a very quick follow-up on the cloud business. Can you talk about the competitive dynamic in this market segment, i.e. aside from you guys, who else is providing the similar cloud services to financial institutions? And also what's your competitive advantage in this financial cloud market.

Thank you..

Patricia Cheng

Thank you Alex. This question will be -- we’ll go to Ye Wangchun.

Ye Wangchun

.

Patricia Cheng

Right now in financial cloud, we are competing with Ali, Tencent and Huawei. We think our advantages in financial cloud include four aspects. Number one, we are more secure as senior financial cloud originates from Penang Group's financial business we have great focus and we prioritize the security of our cloud.

Secondly, in terms of compliance, we are closely working with the regulators to improve our compliance capability. Certainly, our financial cloud work with a variety of platforms we are able to incorporate local cloud with public cloud, as well as private cloud.

Firstly, in terms of costs, Penang financial cloud has been in operation for many years, we are confident that we can maintain our cost at a very competitive level.

Firstly in the industry we know that other than cloud we have had SaaS for us we have been improving our capacity in PaaS in 2019, so we are confident that we can outperform our competitors. Secondly, we can also connect staff to PaaS whereas our competitors may only provide a PaaS services..

Patricia Cheng

I think that sums up our earnings call today. We have overrun a little bit. Thank you for staying with us. And thank you everyone for joining the call today. We appreciate your interest in following us and we look forward to speaking with you again. Thank you..

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect..

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