Good day, and welcome to the Yirendai First Quarter 2016 Earnings Conference Call. I would now like to turn the conference over to Mathew Li, Director of Investor Relations. Please go ahead, sir. .

Thank you, and welcome to Yirendai's First Quarter 2016 Earnings Conference Call. Our earnings press release and supplemental presentation slides are now available on our website. Hope you all had a chance to review the materials by now..

Today's call features presentations by our Chief Executive Officer, Ms. Yihan Fang; and our Chief Financial Officer, Mr. Dennis Cong. Our Executive Chairman, Mr. Ning Tang; and our Director and Chief Strategy Officer of Credit Risk, Mr. Huan Chen, will join the presenters in the Q&A session. .

Before beginning, we would like to remind you that discussions during this call contain forward-looking 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 the actual results to differ materially from those contained in any such statement. 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'll 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 press release. .

With that, I would turn the call over to our CEO. Yihan, please begin. .

Thanks, Matthew, and thank you all for joining the call today. We're pleased to begin 2016 with strong financial results during what is typically our seasonal low quarter for us. Sequential loan facilitation volume grew, while our loan portfolio credit performance remained solid.

Our strong Q1 results reflect continued robust demand for our products and services. We feel highly rewarded and motivated by the market's widespread recognition of the Yirendai brand..

While Q1 is usually considered a seasonal slow quarter for our business, we successfully achieved the sequential growth by leveraging Yirendai's powerful brand name in China's consumer finance market. We facilitated USD 535 million worth of loans, representing a quarter-over-quarter increase of 5% and year-over-year increase of 110%.

As of March 31, 2016, the cumulative principal amount of loans facilitated on our online marketplace reached USD 2.4 billion. We served more than 50,000 borrowers and 203,000 investors during the quarter, of which 50% of the borrowers and 100% of investors were acquired just through the online channels..

On last quarter's earning conference call, we mentioned a number of strategies that we believe will drive sustainable growth of our business in years ahead.

These strategies include providing our target customers with a better spend or user experience and enhanced products and services, partnering with other Internet players and the industry verticals that service our target customers with consumption scenarios, enhancing credit underwriting and risk management capabilities and diversifying our funding sources to build a balanced mix of individual and institutional investors..

During the quarter, we strengthened our commitment to prime urban salary workers by addressing their specific financing needs and improving the user experience. For example, we developed a new term loan product, which takes personal data from the applicants' housing provident fund account that can be accessed directly online.

We continue to work on improving the user experience by creating faster and easier-to-use mobile applications. We're actively working with various partners in the Internet space, such as Baidu and Qihoo 360, to develop online consumer financing solutions that leverage their massive user bases and the vast amounts of online data and traffic..

In addition, we work with a number of partners that have consumption scenarios, including the purchase of secondhand cars, travel and special elective medical procedures. Furthermore, we worked closely with a few players to jointly develop products by utilizing data sets that are customized for our partnership.

We invested a considerable amount of resources into developing tools and the credit-related services to further expand Yirendai's exposure to a broader Internet user base. .

We have always considered risk management as a core focus for us. While we work hard to expand our business, we remain focused on generating sustainable and disciplined growth. In Q1, we further strengthened our risk policies and fine-tuned our risk based pricing models.

The credit performance of our product portfolio continues to improve over time, something our CFO, Dennis, will elaborate more on later..

Lastly, as a strategic initiative to build a diversified and balanced mix of funding sources from individual and institutional investors, we extended loans with total principal amount of RMB 250 million for a trust set up by a fund.

The RMB 250 million loans were taken as the underlying asset for the same amount of asset-backed securities, which were successfully listed on China's Shenzhen Stock Exchange in late April..

With that, I turn over to Dennis to walk you through our Q1 2016 financial results. .

Thanks, Yihan. I will now go over our first quarter financial results. Overall, we had a very strong quarter in Q1 2016. We facilitated $535 million worth of loans, an increase of 110% year-over-year from Q1 2015. This quarter, we also achieved a milestone by crossing the $2 billion mark in loan origination.

As of March 31, 2016, we have facilitated $2.4 billion loans since our inception. We billed a total of $130 million in fee, an increase of 159% when compared with Q1 2015. Transaction fees from borrowers accounted for 93% of total fees billed..

Net revenue in Q1 was a record $85 million, an increase of 187% year-over-year and 20% on a sequential basis. This increase was primarily driven by the growth in loan origination volume due to a strong customer demand for our products and services..

Looking at our revenue mix, we recognized $82 million for loan origination services provided upfront and $3 million for post-origination services. We deferred $3 million for post-origination services for future periods in Q1 2016. $42 million in fees billed associated with risk reserve fund were net included in our income statement. .

In terms of our loan product portfolio during the quarter, 84% of our new loans facilitated were product D with a 28.2% average transaction fee rate. And the product volume for mix for products A, B and C were 5.5%, 3% and 7.5%, respectively, with transaction fee rates ranging from 5.6% to 26.4%. .

On the investor side, we started to introduce lower-yield products. Our 12-month Yidingying average investment yield our platform in Q1 2016 is about 9%, down from 9.3% in Q4 2015, as we continue to benefit from decreasing interest rate environment as well as strong investor demand for high-quality assets on our platform..

To further diversify our funding sources, we successfully completed issuance of our first RMB 250 million asset-backed securities of loans facilitated through our platform, a significant milestone and the first in China's online marketplace lending industry..

Turning on to operating expense. Sales and marketing expense were $39 million for the quarter or 7% of loan origination volume compared with 8% in Q4 due to lower investor acquisition cost, as we saw seasonal strong investor demand during holidays.

Origination and servicing costs were $6 million for the quarter or 1% of loans facilitated, similar to that in Q4 last year.

Our G&A costs were $9 million for the quarter or 11% of net revenue compared to $7 million or 10% of net revenue in Q4 2015 as a result of our recent move into a new office building while temporarily preserving the previous workspace. .

Our profitability further improved in Q1 2016, with EBITDA at $32 million or 37% EBITDA margin compared with $6 million in Q1 2015 and a 20% EBITDA margin. Net income during the quarter was $20 million with a 24% net income margin compared with $4 million and a 15% margin during the same period last year.

This is attributable to the increase in net revenue and timing of revenue recognition due to product mix and also seasonal lower customer acquisition cost..

We continue to see solid credit performance from our portfolios. The recent delinquency rate and vintage charge-off performance are well within our expectation. And charge-off performance for 2015 vintage loans have shown improving trends, which demonstrated our capabilities in credit underwriting and risk management.

Specifically, as of March 31, 2016, the overall delinquency rate for loans that are 15 to 89 days past due was 1.8% compared to 1.3% as of December 31, 2015. The increase reflects seasonality and is within our expectation. The charge-off rate for loans originated in 2015 was 2.6% as of Q1 2016 compared to 1.5% as of Q4 2015 as the loan further mature.

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The charge-off rates for each vintage from Q1 to Q4 2015 is improving, as indicated in the cumulative M3+ net charge-off rate curve on Slide 25 of the Q1 2016 management presentation uploaded on our IR website, indicating strong credit performance of all our products in our loan portfolio..

As of March 31, 2016, the outstanding balance of liabilities from risk reserve fund guarantee is at 6.5% of remaining principal of performing loans, up from 6.1% in Q4 2015. We believe the risk reserve fund liability balance is sufficient to cover expected future payouts and do not plan to fund additional cash in the near term.

We also intend to maintain the 7% cash reserve ratio in Q2 2016 with respect to new loan origination. We expect the solid credit performance to continue as we further refine our risk pricing model, expand our product portfolio into high-quality assets and the improved delinquency management. .

$112 million in liabilities from risk reserve fund guarantee and $14 million payable to fund at fair value as a result of consolidating the trust..

Cash flows in Q1 2016 were also very healthy.

We generated $49 million in cash from operating activities, which was mainly generated from transaction fees charged to borrowers; $6 million used in investing activities, which was mainly related to the purchase of short-term investments; and $3 million used in financing activities to pay off IPO related cost. .

With that, let me go over our guidance for the second quarter and full year 2016. We expect loan origination volume in the second quarter of 2016 to be in the range of $640 million to $650 million and net revenue in the range of $95 million to $100 million and second quarter EBITDA in the range of $20 million to $25 million.

Our full year 2016 projections remain unchanged from our previous guidance. Loan origination volume is expected to be in the range of $2.8 billion to $2.9 billion, full year net revenue in the range from $400 million to $410 million and EBITDA from $100 million to $105 million. .

That concludes my remarks. I'd now like to turn the call back to operator for the Q&A session. .

[Operator Instructions] Our first question comes from Dick Wei of Credit Suisse. .

This is Dan Jiao [ph] calling on behalf of Dick Wei. I have 2 questions.

First one, could you give more updates on our ABS product? And what's our long-term strategy in the securitization?.

Sure, yes. ABS is a strategy in terms of a funding diversification to connect with institution fundings. That will be our long-term strategy in terms of funding sources. This first ABS is a small volume at RMB 250 million, and we expect to continue to conduct ABS throughout the years.

But the volume is probably not going to be very significant to start with. We probably will continue to do each quarter but in a controlled pace. .

And last question, how do you see the competitive landscape in China's P2P market? And can you share with us your view on the likely regulation going forward?.

So you're asking about regulatory framework as well as competition?.

Yes, right. .

Yes. On the regulation front, the CBRC [indiscernible] alliance and specific rules are not officially out yet. They are still being reviewed as we understand. But -- and actually, industry associations and companies are actually operating under the spirit of such rules and guidelines.

For example, Beijing P2P Association is organizing companies to do self-review and peer review, which we believe are quite helpful. And so we believe that we are in full compliance. On the competitive landscape, yes, front, we expect that the market will become more and more competitive.

And we see that there are more and more companies trying to do online lending. And last year, there were already such companies. And this year, we see more coming. And so we continue to strengthen our market leadership by doing further R&D on data sources, strengthening our risk management model, so on, and we believe we have a lead in the market. .

And our next question comes from Mayank Tandon of Needham & Company. .

Dennis, I just wanted to ask you about some of the financials. You obviously beat expectations pretty comfortably relative to what you had set back in March, but you aren't flowing through the upside into the full year guidance. So if you could comment on that, one.

And secondly, also just in terms of the second quarter EBITDA coming down on a sequential basis, is that just a function of increased marketing and higher customer acquisition costs, or is there something else that's driving that lower versus the first quarter performance?.

Sure. Yes, thanks. I think first, in terms of full year guidance, right now, we're in May. Of course, we'll continue to see strong demand of our business, both from the borrower side as well as the investor side.

However, we -- from a management perspective, it's still little bit early to give us a good solid transparency or confirmation on the full year financial performance. So at this moment, we maintain our full year guidance, even though we continue to see good demand on our business on both sides.

I think in terms of the margin guidance, as we mentioned, Q1, we actually see a benefit of the seasonal strong investor demand.

So the customer acquisition for the investor has actually come down quite significantly, while in terms of our business operations, I think our business will continue -- it's still in a very fast growth stage, and there's a huge market ahead of us and many, many new product developments that we will focus on.

So I think we will maintain our guided full year EBITDA margin around 25% as our operating guidance. So that's why Q2, we'll continue to guide with that. And the Q1, more or less, is a seasonal strong investor demand causing the benefit of lower customer acquisition costs that gives a high margin for that particular quarter. .

Great. And then just a follow-up question in terms of the delinquency rates and the charge-off rates, I think I heard you, you said seasonality has a lot of do with the uptick relative to the fourth quarter.

But if you could just provide some more color and thoughts behind what is driving the higher delinquency rates and the charge-offs rate on a sequential basis? And then what should we expect going forward through fiscal 2016?.

Yes. I think first, the delinquency as well as charge-off performance is within our expectation. However, usually in Q1, because the holiday seasons, the collections and then ourselves usually slow down -- collection activity slows down a bit. So usually from a seasonality perspective, you'd see slightly uptick of the delinquencies or the charge-offs.

And also, the other reason is that the loan volume growth usually slow down sequentially in the first quarter as well. That's just some of the granularity on the business performance. But the overall delinquency rate as well as the current charge-off performance are -- continue to be in our expectation.

And I think the key thing really to look at our overall credit performance of our loan portfolio is really the charge-off curves that shows in our management presentation on Slide 25 that you can see for the 2015 vintages. Q1, Q2, Q3, Q4, the vintage curve is actually showing a very healthy continued improving trend.

So that gives us a very good confidence in terms of our overall asset performance and what the delinquency or charge-off performance is going to be through the 2016.

And in terms of overall risk management, we'll continue to be very focused in terms of our risk pricing policies, product development and delinquency management through 2016, and we expect the overall performance of our credit will continue to be solid. .

Great. And one final question. In terms of the breakdown of the 4 category loan types, A, B, C, D, how do you see that evolving over time? Obviously, D is a very high percentage.

But longer term, how does that mix evolves based on what is going on in China in terms of the demand for P2P lending?.

Yes. I think, first, we serve the urban salary workers in China that -- with the product from A to D, which we see strong demand for each different products. And we would expect that given our funding costs coming down, we'll be more available to serve higher-quality borrower space in China.

So we would expect our A, B, C type of products, the percentage to increase as we're going through the year. And also, we will be working with more partnerships and more channels to tap in more high-quality assets in China. So overall, we would expect the product mix shift to -- towards A, B, C.

But however, these type of product loans performing very, very well, profitability is also very, very good. So we'll continue to see that as a major part of the business in 2016. .

All right. If I can just squeeze one more in. The take rate, at least based on my calculation, went up to 15.9% in the first quarter, up from 14% in the fourth quarter.

Is that tied to the mix shifting more toward D in the short term? And then how should we think about the take rate going forward?.

Actually the reason is more due to the trust. In Q4 2015, we had a 2.5 billion -- sorry RMB 250 million trust. And that trust revenue recognition is actually amortized. It's not upfront. If we recognize those trusts upfront, we will actually see our revenues increase in the mid-15 range, 15.5 range.

So in terms of the revenue take rate actually from product mix as well as online and offline product percentage, there is not a significant change. It's more due to the revenue recognition of the fund back in Q4 2015. .

And our next question comes from Richard Xu of Morgan Stanley. .

Just 2 quick questions. One is, this year, actually a lot of banks are also trying to expand their credit card business, and obviously, probably potentially raise their credit lines for some of the existing credit card users.

Are you seeing any competition, any potential competition on the rates that you're offering? Secondly is, in terms of the evolving business model, are you thinking about cooperating with some of these Internet firms and trying to actually get referrals from these channels and then also help you to -- understand better where the funds are actually being used going forward?.

Richard, the first question is about competition from banks.

The second question is about cooperation with Internet companies, is that correct understanding?.

Yes. .

Okay. So regarding competition from banks, all the so-called banks going downstream, our observation is that, that kind of offering is mainly for a different credit segment, yes, not the segment we serve. Yes. And so what we do is actually complementary to bank offerings.

And also, I think more and more banks will like to partner with us by becoming lenders on our platform for the segments that they cannot serve with their existing infrastructure.

On the Internet company cooperation front, yes, our view is that in the future, there will be more and more cooperation between Internet companies and Internet finance, fintech companies like Yirendai. However, as you may well know, China market is highly dynamic and many Internet companies trying to do finance on their own.

Of course, we are in talks with several Internet companies as Yihan has mentioned, yes. And so we will see strategically more and more cooperation with Internet companies. And our view is that finance is beyond most Internet companies' comfort zone and capabilities. .

And our next question comes from Polar Zhang of BOCI. .

This is Polar from BOCI.

My question is how do you think the supply side reform will impact our asset quality? Would our risk model be able to identify if a potential client actually will become employee of the corporate [indiscernible] default?.

Yes. I think take on our offering to our borrowers, many of our borrowers will literally [indiscernible] have already identified their industries and their profession. So we're also double-checking during our underwriting process.

And the reason we also did some analysis based on some regions, which is early product who have done economic slowdown, but according to our analysis, based on our previous risk-related performance, they could have seen many big changes for our risk performance used to be [indiscernible] and our impacted range. .

Yes. I think also to just add on top of that, we are taking precaution measures in terms of our risk policies from geographic and industry perspectives. And also in our credit modeling scores, we do have a scoring for preferred professionals, that to capture those industry or their professional risk. .

And our next question comes from Sarah Tian of CICC. .

Indeed, my question is about the competition landscape in the customer finance market in China as well. Earlier on, you talked about the competition against the banks' credit card business. So my question is really on the rest competitors here.

You know that in China, we have consumer finance -- offline consumer finance companies as well as some e-commerce platforms, which offer purchase on credit as well. So from management perspective, we see these offline consumers who haven't really grown up in China over the past decades.

So what's the reason they haven't grown up given that the consumer -- consumption growth in China is pretty strong? And what's the restrictions there, and how could Yirendai overcome them going forward, because we're targeting the same market here as well?.

So the question is about competitive landscape and why consumer finance hasn't picked up in the past years?.

Yes, and what's the restrictions there and... .

Yes, so Yihan and I will try and answer this question. And competitive landscape is surely becoming more and more dynamic. There are banks and fintech companies, also consumer finance companies and also those adjoint Internet companies, yes, trying to do finance in some ways.

And our view is that different players have different strength,, different angles and serve strategically different purposes. Yes, for example, we talked about banks' strategy utilizing their current like a credit card basis and Internet companies doing finance to serve their ecosystems, yes, to do better businesses.

And also, there have been more consumer finance companies in the -- yes, competitive landscape. And they have like partnerships with like retailers, so on. And some have quite acquired some scale, yes. And our view is that it's about different credit segmentation covered by different players.

For example, like WeBank, yes, its consumer segment is below like credit card, like 18% rate APR. And their expected loss rate is below -- well below 1%. So that's a very different credit segment from ours. So I think different companies have their own credit segments to cover and develop proprietary capabilities to do that.

Yes, Yihan, do you have anything to add, please?.

Yes, I just want to add a point that because Yirendai has been doing like end-to-end online using technology lending for years and we accumulated experience in terms of like underwriting online, using the data online with technology.

So we have a benefit of partnering with Internet companies to do the consumer finance -- financing needs like for online purchases. And we see a unique advantage, especially for like a big item consumption needs, and we're already making progress in those areas. .

Yes. To add to that, yes, the reason we believe consumer finance in the past decade probably didn't take off big time is mainly because China's credit infrastructure is still in early stage, quite poor. Still there isn't a credit bureau system. We cannot report our data to central bank and cannot receive data from central bank.

And data sharing mechanism among industry players is still weak. So as a result, it's not easy to do consumer finance risk management. And I think that's where, yes, we've built our edge, yes. Yirendai's parent company, CreditEase, is one of the first starting to do customer finance, non-bank finance from 10 years ago, doing, yes, offline and online.

And Yirendai specializing in online was also among the first, yes, started 4 years ago when most players were focusing on offline. So I think our early mover advantage is quite clear.

Although the credit infrastructure, the big infrastructure is still quite early, quite weak, we have built our own proprietary risk management model based on the biggest credit database in the industry. And we believe that gives us quite some edge. .

I'm showing no further questions. We're going to conclude today's conference call. We thank you all for attending today's presentation. .

Thank you. .

Okay, thank you..