Ladies and gentlemen, thank you for standing by, and welcome to OneConnect's Third Quarter 2023 Earnings Call. .

[Operator Instructions].

Please note, this event is being recorded. Now I would like to hand the conference over to your speaker host today, Mr. Rick Chen, the company's Head of Investor Relations. Please go ahead, Mr. Chen. Sorry, we have lost connection with the guest speaker now. Please hold, we will join you shortly when the conference is begin. .

[Technical Difficulty].

Thank you, operator. Hello, everyone, and welcome to our 2023 3rd quarter earnings conference call. Our financial and operating results are released earlier today and currently available on our IR website. Today, you will hear from our Chairman and CEO, Mr. Shen Chongfeng, who will give you opening remarks and business highlights.

Afterwards, our CFO, Mr. Luo Yongtao will bring you latest the corporate development and over a closer look into our financials. And then in question-and-answer session, our management team will be available to you. We have our CTO, Mr. Li Jie; and Head of Strategy, Corporate Planning and Product Management, Mr. [indiscernible]. .

In today's conference, our management team will make statements in Mandarin or in English. For those in Mandarin, a contracted translation will be provided. In case of any discrepancy between the Mandarin version and the English version, our statement in the original language shall prevail. .

Let me quickly cover the safe harbor statement before we start. As we will be making forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that we will present both IFRS and non-IFRS financial measures.

With that, I'm now pleased to turn the call to our Chairman and CEO, Shen Chongfeng. Mr. Shen, please. .

[Interpreted].

Hello, everyone. I'm Shen Chongfeng. Thank you for taking the time to dial in OneConnect's third quarter earnings release. On behalf of OneConnect, I'd like to welcome investors, analysts and friends from media to join this call. It's a great pleasure for me to share with you what we have achieved this quarter. .

A couple of days ago, the Central Financial World Conference has highlighted the importance of technology, innovation in finance, green finance, financial inclusion, pension finance and digital finance. And as an important part of the digital economy, digital finance is the pillar of its development. .

We witnessed new excitement for AI caused by ChatGPT in 2023. This new round of disruptive technology with AI at the center has opened up greater possibilities for digital transformation in the financial industry.

According to a research paper by McKinsey, generative AI alone can generate another $200 billion to $340 billion for the banking industry, which represents 2.8% to 2.7% of total industry revenue. Together with a new round of industry structural upgrade in China, steady economic recovery and the transition from previous growth drivers to new ones.

We are very excited about demand in digital finance and our performance ahead. .

Our strong growth momentum in the first half of this year continued. We achieved solid performance in the third quarter. Net loss attributable to shareholders in the first 9 months narrowed by RMB 414 million or 60% compared with the same period last year. Gross margin improved by 0.9 percentage points year-over-year to 36.1%.

These metrics mean we are well on track to becoming profitable by medium term..

Now please go to Page #3. Centered around our business philosophy of value, win-win cooperation and quality development, we achieved significant progress in 3 core initiatives, namely strengthening customer expansion, focusing on product upgrades as well as deepening loss reduction and improving efficiency.

At this stage, we are also expediting efforts to explore Ping An Group products and upgrade our own products with more resources centered around high-value products.

And at the same time, the company has also fine-tuned ROI management of projects and cost management, which will put us closer to medium-term strategic target of breaking even and becoming profitable. .

Next, on Page 4. In terms of products, upgrades continue, further contributing to quality operations. To enhance value creation and proactively adjust business structure, OneConnect has been up with saving out high customization, low gross margin and low-value products and strengthened resource management of products to be phased out..

We have also shifted our focus on upgrading and growing standardized on products and services -- and pivoted towards charged volume services. .

OneConnect has also adjusted R&D spending, including pooling resources on core hit products and gradually increasing contribution from new products. Thanks to these efforts, product interactions accelerated and metrics like product standardization and delivery efficiency has been improved. .

Next, on Page 5. 2023 remains a key year of Stage 2 strength that is broadening customer engagement. During this stage, we are committed to 1 body, [ 2 wing ] where we focus on financial institutions while expanding ecosystem and overseas. .

Next, on Page 6. In digital banking, we landed a new small management contract with a national -- with a joint national bank this quarter. The contract value exceeded over RMB 10 million. .

We further expanded digital transformation into accounting and financial operations management scenarios. With portfolio strategy, the offering run simulation to select multiple decisive metrics, which are then used to guide asset and liability management and help banks to transform from experience driven to [ fully ] driven.

It also enable banks to shorten simulations of budget scenarios from 1 week to 30 minutes and replace monthly metric reviews with daily review. .

Additionally, we also landed an economic capital project in a large national commercial bank, which represents the latest use case of measures for the administration of capital of commercial banks. Our product aims to achieve transformation through capital-efficient development.

With risk-adjusted returns on capital as the core standard for capital allocation, we provide measurement for banks and their branches, building a flagship case for the application value of economic capital management system. .

Next on Page 7. In digital insurance, we have made significant R&D investment in new solutions to address 10 points of small- and medium-sized auto insurers, namely risk assessment, cost management and risk management.

We are prepared to launch an end-to-end solution covering client settlement plus underwriting plus service, which stems from Ping An Group's experiences into -- in auto insurance operations in over 3 decades. The beta version is expected to come out late this year and the official 1.0 version will be unveiled in the second quarter of 2024. .

Next, on Page 8. For Gamma platform, we further integrated AI into key nodes of our operations. For instance, our AI interview robot incorporates AI technologies, such as smart conversation, digital personality and visualized risk management when reviewing retail loan applications. The solution improves the automatic loan approvals by over 30%.

In online wealth management services, our AI robot boost customer conversion by 40% with the help of AI technologies like knowledge graphs and smart recommendation as well as scenarios like preset scripts and card and templates. .

Next, on Page 9. With more new landmark projects in this quarter, we also further expanded the cooperation in 2 wings, namely ecosystem and overseas. We landed a [indiscernible] project in public utilities worth over RMB 10 million, taking up operation and maintenance as well as system construction in this area.

On top of that, we kicked off a cooperation with the top national bank in asset liability management with the contract worth also over JPY 10 million. OneConnect offering will help the bank improve their bond transfer pricing mechanism as well as enhance their business data pricing mechanism and analysis visualization. .

We are also proud to say that Hong Kong Stock Exchange brand new IPO settlement platform, FINI, to which OneConnect preventive technology support is expected to be officially launched soon.

With the new platform, the IPO turnaround time from pricing to trading will be shortened from T+5 to T+2, which marks another important milestone for Hong Kong's capital market. .

Next, on Page 10. Our hard work has brought in multiple awards from third-party and renowned media institutions. We won the first prize of science and technology progress of Guangdong Province in 2022 and made it into IDC global FinTech Top 100 list conducted for a number of consecutive years.

Ping An Financial Cloud received awards from China Academy of Information and Communications Technology. This September and October, we hosted Retail Banking Digital Transformation Summit and Remote Banking Development Summit in Shenzhen and Shanghai, respectively.

In our exchanges with many executives from banks, we noted firsthand that the industry is under operation and management pressure as a result of narrowing interest rate margin and increasing NPL ratio.

Commercial banks, especially medium and small sized subsidy and rural commercial banks are in urgent need of leveraging third-party capabilities, enhancing operation management and improving digital utilization. That means broader market and broader possibilities for top fintech companies in this industry. .

There are still 2 months to go this year. As the Chinese economy gradually warms up, we will continue to improve operating strategy, target as business structure adjustment and product upgrade, maintain stable financial performance and make steady progress towards medium-term targets.

Additionally, we will focus on improving revenue from third-party, seek opportunity to expand international cooperation, capitalizing on digital transformation along the belt and road initiative in regions such as Southeast Asia and Middle East. Thank you. .

Next, I'll hand it over to Luo to brief you on a recent Board resolution and our financial performance in this quarter and the first 9 months of this year. .

Thank you. Good morning, everyone. I'm pleased to share with you some updates about our latest corporate development. Yesterday, we entered into a share purchase agreement with the Lufax and POB. OneConnect agreed to sell and Lufax agreed to acquire 100% share of POB at consideration of HKD 933 million in cash.

Upon closing, OneConnect will cease to hold any interest in POB and the POB will cease to be a subsidiary of OneConnect and will no longer be consolidated into the financial statement of OneConnect. POB was established in December 2018. It obtained 1 of the 8 virtual banking licenses in Hong Kong in May 2019 and opened the business in September 2020..

POB was the first [ voting ] bank to provide flexible and efficient banking services with a focus on SMEs and was the first voting bank to participate in the SME financing guarantee scheme launched by the Hong Kong Mortgage Corporation. In terms of credit assets, POB adopted alternative data to support its credit decisions.

Our needs to better understand SMEs financing needs and perform high-quality credit risk assessments. As of the first half of 2023, the revenue of POB was HKD 75 million or 3.6% of OneConnect's total revenue and the net loss was about HKD 87 million. .

Net purchaser, Lufax is a leading financial services inhibitor with a strong capital base, reach product lines and mature risk control and technological capabilities. It offers financing products designed principally to address the needs of small business owners.

Lufax has established a relationship with financial institutions in China as pending and credit enhancement partners to provide general unsecured and secured loans under its core retail credit and enablement business model. Lufax is also listed on New York Stock Exchange and Hong Kong Stock Exchange.

OneConnect is a technology and service provider for the financial services industry in China with an expanding international credits. .

Taking into account the current business strategy of the group, the directors and management of OneConnect focus on technology-driven products and services and allow us to better deploy appropriate resources.

Upon completion of the disposal, OneConnect will continue to focus our Stage 2 strategy and to enhance existing technology solutions and products. As I just mentioned, upon closing, the disposal will bring us HKD 933 million in cash.

The company currently intends to apply the process from the disposal as general working capital improves because the core business [ operators ] of OneConnect to focus on our technology capabilities and products to facilitate the long-term business development. .

At the [indiscernible], we believe that the strong financial and technology capability from Lufax will help POB to achieve sustainable and healthy progress going forward. The Board and management team undertakes strategic review of our business from time to time with a view to maximizing returns to the shareholders.

Next, let's go through the financial results of Q3 2023. We have achieved a solid third quarter. In Q3, we have made the potential progress in loss reduction, which is consistent with our strategic goal to achieve midterm profitability.

Although we have experienced a revenue decline in the past few months, it is during this time that we have the opportunity to showcase our resilience and ability to adapt. .

We will be exploring new opportunities, assessing our current processes and making necessary adjustments to ensure that we can regain growth momentum in the near future.

In the third quarter of 2023, we delivered revenue of RMB 844 million, decreased by 21.1% compared to the same period last year, primarily due to the decline in transaction-based and support revenue. Revenue generated from third-party customers decreased by 12.6% to CNY 307 million in the third quarter.

The number of Premium Plus customers decreased year-over-year to 154 from 163 for the same period in 2022, primarily caused by fewer customers in digital banking segment due to slower-than-expected banking IT spending. .

We are thrilled to see net loss attributable to shareholders was CNY 91 million, and the corresponding net loss ratio to shareholders improved by 1.6 percentage points on a year-over-year basis to a negative 10.8%. Now let's turn to our revenue mix.

In the third quarter, our third-party revenue decreased by 12.6% to CNY 307 million compared to Q3 last year, contributing 36.4% of total revenue in Q3. Third-party revenue growth remains the key focus of our second stage strategy.

We will continue to seek opportunities that align with our growth objectives, building further expansion of our third-party revenue streams. .

In the third quarter, revenue from Lufax decreased 48.5% to CNY 61 million and contributed 7.2% of our total revenue. The revenue decline from Lufax was mainly due to Lufax's business operations optimization, resulting in lower demand for business origination and risk management services.

Revenue from Ping An Group increased 20.6% to CNY 476 million and contributed 66.4% of our total revenue. Revenue declined from Ping An Group was primarily due to a decline in transaction volume, such as operational support and risk management products.

The services provided to Ping An Group are core technology solutions, which have been deeply embedded into Ping An Group's daily operations. .

Looking ahead, we will continue to fully support Ping An Group's business reforms and look for new cooperations. In the first 9 months of the year, revenue from third-party customers decreased 8.9%. Revenue from Lufax decreased 42.1% and revenue from Ping An Group dropped by 13% for the corresponding period in 2022. .

Moving on to revenue mix by business type. Let's take a look at our Q3 results first. Implementation revenue decreased by 13.4% on a year-over-year basis to CNY 175 million, mainly due lower revenue contribution from new customers as financial institutions recovering from the pandemic impact.

Revenue from business origination services decreased by 70.9% year-over-year to CNY 27 million, primarily due to the declined transaction volume and our proactive actions of phasing out lower value products in the Digital Banking segment.

Revenue from risk management services decreased by 26.3% year-over-year to CNY 77 million, mainly due to reduced transaction volumes in banking loan solutions because of slower-than-expected banking activities in the third quarter. .

Revenue from operation support services decreased by 33.5% on a year-over-year basis to CNY 195 million, which was primarily caused by reduced demand from auto insurance customers and banking customers. Revenue from cloud services platform was CNY 297 million, stable on a year-over-year basis in the third quarter.

Revenue from post-implementation support and other services decreased by 30.3% year-over-year to CNY 34 million in the third quarter. The decline was primarily due to lower demand for auto ecosystem synergies. Revenue from PAOB, Virtual Banking business in Hong Kong, increased by 30.4% to CNY 37 million as compared to the third quarter last year. .

If we look at the first 9 months of 2023, implementation revenue increased 13.5%. Revenue from business origination dropped 65.4%. Risk management decreased 25%. Revenue from operation support declined 23%. Cloud services platform revenue decreased 5.2%. Revenue from post-implementation support and other services dropped 32.6%. And PAOB increased 39.6%.

As you can see, we have been diligent in identifying and improving underperforming areas of our business and we focus on enhancing revenue structure. We will remain committed to integrating our product mix and adopting a stable and a sustainable stock-based charging model. .

Let's turn to revenue mix by product sectors. Gamma Platform sector, the focus on product innovation in recent years contributed to the biggest chunk of our revenue, declined slightly 2.4% in the quarter of 2023 to CNY 457 million and accounted for 54.1% of total revenue.

The decline was mainly caused by reduced transaction model of our open platform products. Digital Banking sector, which accounted for 23.9% of total revenue, reduced by 41.4% on a year-over-year basis to CNY 201 million.

That was mainly caused by a reduction in transaction volume of our business origination services and risk management services, which were related to our initiatives to fit out lower-value products and the impact from the lower-than-expected banking activities. .

Digital Insurance sector, which accounted for 17.6% of total revenue decreased by 35.2% to CNY 149 million in the third quarter of 2023, primarily due to reduced demand in other ecosystem services. In each sector, we phased out products with low margins, products with low technology value-added as well as those with limited potential for growth.

In addition, Virtual Banking sector, as I just mentioned, accounting for 44.4% of total revenue. .

Customer numbers. In the third quarter of 2023, the number of Premium Plus customers decreased to 154 as compared to 163 for the same period last year, primarily due to fewer customers in Digital Banking sector. We believe as we continue to advance our initiatives, we expect our customer base will be back and at full steam.

More Premium Class customers will use our products and services. .

Now let's take a look at the gross margin. We are very glad to see our gross profit reached CNY 295 million in the third quarter of 2023. Gross margin remains flat at 35%. And on a non-IFRS basis, gross margin increased by 1 percentage point to 29.4%.

In the first 9 months of this year, our gross margin improved by 0.9 percentage points to 36.1%, and the non-IFRS gross margin increased by 0.6 percentage points to 39.7%.

In the first 3 quarters of 2023, the continued efforts in product integration, standardization and delivery efficiency improvement, together with execution on quality growth helped improve our gross margin. We will stick to that strategy and continue the endeavor of achieving profitability. .

Moving on to expenses and net loss attributable to shareholders. You can see that we are well on track to our midterm review target. First of all, our research and development expenses came down 19.9% to CNY 230 million from CNY 287 million in the same period of last year.

As a percentage of ratio, it slightly increased to 27.3% due to the reduction of total revenue. In the third quarter, our continued investment in technological innovation and organizational capability remains unchanged as our products were more upgraded and integrated. We further improved our product delivery efficiency.

Looking ahead, we will keep investing in research and development at a more measurable and reasonable pace to enhance our product competitiveness in the market. .

Our sales and marketing expenses for Q3 decreased 18.3% to CNY 73 million compared with CNY 94 million in the third quarter of 2022. The improvement in sales and marketing expenses, mainly benefited from our continued sales force, improving efforts and the decrease in marketing and advertising activities.

Our general and administrative expenses decreased 44% to CNY 94 million from CNY 167 million in the prior year. As a percentage of revenue, it decreased to 11.1% from 15.7%. The decline in general and administrative expenses was primarily due to stringent cost control measures and a reduced labor cost.

It is worth mentioning again that under a challenging business environment, our net loss attributable to shareholders improved substantially to negative CNY 91 million from negative CNY 133 million in the same period last year. And the corresponding net margin to shareholders improved 1.6 percentage points to negative 10.8%. .

This achievement reflects our consistent commitment to enhancing our financial health and demonstrates the effectiveness of our GAAP actions on the unit towards profitability. The next page demonstrates the trend of our net margin improvements to shareholders in the past few years.

From this page, you can see a clear trajectory of our path to profitability over the years. Our first 9 months of this year results continue to reflect that the effects of our disciplined execution of cost control accompanied by improved operational efficiency, marking another milestone in the path to breakeven.

We will continue our product integration efforts and strive to improve operating efficiency and business margins. .

Looking ahead to the rest of the year. Although we continue to see a decrease of unpredictability at a macro level, our focus remains on improving third-party revenue where we will continue to enhance gross profit margin, focus on cost control and operational efficiency improvement to stay well on track to the objective of profitability. .

Next page relates to key financial metrics of the third quarter of 2023. Lastly, we summarize adjustments in IFRS gross margin for reference. Thank you. .

Thank you, Mr. Luo. Operator, we are ready for questions. Please open the line. .

[Operator Instructions] We now have our first question from Lydia Lin from Morgan Stanley. .

[Interpreted] My question is about the Board management changes in Ping An level.

And are there any new business updates or operational or priority changes in OneConnect business that we have observed?.

And the second question is all these big projects that we have signed up in third quarter this year, when can we expect them to be recognized as our revenue?.

[Interpreted] So the Board conducts strategy reviews on the company's business from time to time, and OC has established solid strategy planning and is very well organized. We have found very professional and good replacements for resigned directors. So we are confident that the current management team will continue to achieve quality development.

And for the future, our focus will be on the development of quality products as well as to enhance operation efficiency. .

Thank you very much. For the second question, it will be taken by Mr. Luo. .

[Interpreted] For several major projects that we landed this year, we expect that this project will last from 2023 to 2024. And for this year, revenue will come in for some of these projects. However, based on the milestones that we can recognize, we believe that more revenue streams will come in steadily next year. .

[Foreign Language].

Thank you for your question. And the question will be taken by Mr. Shen, please. .

[Interpreted] As I've mentioned in the opening remarks, the Central Financial Work Conference has highlighted the importance of technology innovation in finance as well as green finance and digital finance.

So for small- and medium-sized financial institutions, especially rural and city commercial banks, their main focus will be about to better serve the real economy and to be more compliant with the regulatory requirements. .

So there are targets of better serving financial -- better serving real economy, being more compliant with regulations as well as the new trend in [indiscernible].

So the implications on small and medium-sized institutions is that there will be urgent needs to enhance their digital capabilities, both in their everyday businesses as well as in their internal operations. .

For OneConnect, our offerings including digital transformation in retail banking, credit management as well as asset liability management, additionally in our -- and these are -- these products are a testament to our hard work in focusing on products and serving medium- and small-sized institutions.

And therefore, we are very confident about our development in the following years. Positive. .

[Operator Instructions] We now have our next question from [ Allen Kwan ] from Citigroup. .

[Foreign Language] I just have a quick follow-up on the transaction announced today. Could management share a little bit more color on the rationale behind the divestment of PAOB to Lufax? And I'm wondering if management has any planned -- shareholder return plans regarding the proceeds which from the divestment. .

Thank you for your questions. For first question, it will be taken by Mr. Shen. And the second one would be taken by Mr. Luo. .

[Interpreted] PAOB has become the virtual bank for the small -- for SME financial services in the Greater Bay Area. Its strong performance showcases OneConnect tax capabilities. .

When we acquired for virtual license in Hong Kong back in 2019, we wanted a use case for our end-to-end performance platform solution to better serve prospective financial institution customers in Hong Kong and overseas and capitalize on increasing demand for digitalization from financial institutions.

And for these purposes, we have achieved what we wanted. .

OneConnect is a technology service provider for financial institutions in China. We conduct strategy reviews on our businesses from time to time to be more focused with our businesses and to maximize returns for our shareholders.

Given our current business strategy, the company believes the disposal is a good opportunity for us to focus more on technology-driven products as well as services that are less cash demanding and allocate more resources to products and services -- to technology products and services.

After the disposal, OneConnect will continue to pivot to existing technology offerings. .

So proceeds from this disposal will be used as working capital to improve our cash position and operations. As of September 30, cash, not including cash from PAOB, amounts to CNY 1.79 billion in OC. That means we have sufficient funding for long-term development.

And with this disposal, we believe that this will help us improve sustainable and healthy development of our business. .

Under our current strategy, the proceeds will be used to focus on developing technology products and capabilities. And this will help us with our long-term healthy and state of our business development. Thank you. .

I would like now to hand over back to Rick for any closing remarks. .

Okay. Thank you, operator. Thank you, everyone, for joining the call today. If any questions, feel free to contact our IR team, and we appreciate your interest in following us and look forward to speaking with you soon. Thanks. .

This concludes today's call. Thanks for joining. You may now disconnect your lines. .

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.].