Edited Transcript of PT.OQ earnings conference call or presentation 15-Jun-20 12:00pm GMT

For our loan facilitation business in 2019, the total volume of loans facilitated decreased by 25% of year to RMB 11 billion. This contraction was caused by both uncertain micro conditions and our decision to terminate certain high-risk loan products.

To fill this gap during 2019, we shifted our focus to accelerate the development of our point-of-sales loan business and to refine our service offerings, to expand our base of large-scale partners. In particular, we focused on the development of point-of-sales personal loans, which have higher margins and better asset quality in general. Throughout such efforts, we have further enhanced our loan quality, improved our product margins and reduced our credit risk exposure.

In online travel vertical, for example, we made our point-of-sales installment loan services accessible to all users of the 2 leading online travel platforms in China, Ctrip and Qunar.

Besides that, for telecom carriers, we continue to strengthen our partnerships with the 3 dominant mobile telecom operators in China: China Mobile, China Telecom and China Unicom. As a result, 71% of our total loan facilitation in 2019 was generated through point-of-sale loans, and point-of-sale personal loans accounted for about 50% of our total loan facilitation in 2019 compared to only 20% in 2018.

During this year, as the global economy showed its weakness and the credit cycle reviewed a downturn, we systemically reduced our loan facilitation business risks by further optimization our risk management procedures. As a result, the delinquency rates of loans, which we facilitated in 2019 remained stable, while the vintage delinquency rate of our point-of-sale installment loan remained manageable at 1.5% throughout the same period.

Secondly, for funding sources, we persisted in expanding our partnership with financial institutions. To make such collaboration more sustainable, we strive to continually monitor and adjust our asset quality for our funding partners. For example, during the first quarter of 2019, over 95% of our total loan volume was funded by non-P2P financial partners, 78% of our total loan volume was — total volume in 2019 was funded by non-P2P financial partners compared to that of 51% in 2018. Such promising results illustrate a good progress that we have made on this front as we continue to partner with more licensed financial institutions, and thus, significantly reduce our dependence on both P2P funding and connected party, Jimu.

In fact, we have suspended our funding partnership with Jimu since it announced its exit from P2P business in February of 2020. Similarly, we have eliminated all of our potential exposure to those risks related to Jimu, allowing us to pursue our growth prospects more independently in the future.

During 2019, we started to offer risk-sharing services to a selected group of financial partners as a way to deepen our existing leadership and cultivate new partnerships with financial institutions. We began to offer risk-sharing services in order to comply with the prevailing business practice of China financial services industry. At the same time, we’re aware of potential impact from risk-sharing services due to asset quality volatility. And thus, we have remained extremely cautious regarding our selection of organizations, which we offer risk-sharing services to.

In the second half of 2019, we made a cautious decision to wind down our risk-sharing businesses. Meanwhile, the outbreak of COVID-19 also encouraged us to accelerate this process. Although the decline in revenues generated from our risk-sharing businesses were unavoidable impact our financial performance in the short term, we believe that this is the right long-term decision, since it will help us to sharpen our business focus, enhance our asset-light capital structure and improve our cash flow and profit margin, all of which are essential to achieve sustainable growth going forward.

Looking into the rest of 2020. We anticipate high systemic risks and greater microeconomic uncertainties. In order to mitigate such risks, we will remain focused, continue to focus on development of our technology-enabled strategy. We also plan to continue prioritizing this investment, which can enhance our technology capabilities, expand our partner base and accelerate our development on new business initiatives.

Now I would like to use the rest of this call to go over our key business development initiatives in place for the remainder of 2020 and beyond.

First, our ability to empower our partners with risk-free technology service will be a key strategic focus for us during the rest of the year. We have already started to provide digital retail credit solutions and system software services for personal credit loans, point-of-sales installment loans and micro loans on this front. Our financial partners, for example, China National Investment & Guaranty Corporation or Zhong Toubao, is a good example of how we use our cutting-edge technology to accelerate our partners’ business expansion.

Using our technology, we were able to provide Zhong Toubao with a series of technology solutions, which enable them to successfully interface with the operating system of several major asset platforms in China. We’ll also work with Zhong Toubao to jointly develop intelligent lending solutions and thus help to further refine PINTEC service offerings.

[Shenzhen] Financial Leasing is another good example of how our risk-free technology service are well positioned to continue growing in the future. We partnered with Shenzhen Financial Leasing to help develop its data interface capabilities using our SaaS solution. As a result, Shenzhen was able to interface with BestPay, one of the largest mobile payment service platforms in China, and thus, will be capable of collecting feedback data from BestPay’s platform. The ability to collect this data is highly valuable to Shenzhen and it can analyze the data for risk valuation and for sale lead generation purpose. This is particularly useful for its installment package.

Another example of this type of work is our partnership with (inaudible) factoring, while assisting (inaudible) factoring with its initial user credit screen process through which we can utilize our system to generate recommendations to the company based on the users’ credit profile. Furthermore, while also developing a management system for the company to help streamline with both its daily operations and its information synchronization process with other platforms.

Our ability to empower business through our technology has also helped us to expand globally. During 2019, for example, we adjusted our globalization strategy to focus on providing those technology solutions, which are not affected by local licenses and the policies of our key target markets.

In March 2019, we acquired InfraRisk, a leading fintech service provider in Australia, that has successfully developed an automated credit process management tool called Credit Value Maximizer or CVX. It should be noted that multiple international financial institutions have already adopted CVX, including the National Australia Bank, Toyota Finance and Judo Bank. We expect to further expand CVX’s footprint in Europe this year by leveraging Toyota Finance’s market resources, while also continuing to take market share in both Australian and Asia Pacific markets.

Furthermore, we believe that CVX has strong potential in China as well, especially in the supply chain finance industry, as such. We’re currently in process of bringing the technology into China as well as formulating partnership agreements with multiple large trading groups around the world.

On the wealth management front, we continue to develop business of digital wealth management solutions. So far, these solutions have enabled us to further expand the scope of our work with existing partners such as Bank of Nanjing and [Jiangxi] Provincial Associated Press.

Furthermore, in line with our commitment to upgrading technology capabilities, we have developed a robotic process automation solution, also called RPA solution, which can be used in variety of business scenarios. In 2019, for example, we used our RPA solution to help major exchange automation, a portion of its human resources, finance and routine office work functions. Following this initial process and success, we have established an innovation center in Shanghai to promote the adoption of RPA solutions with financial institutions. We also aim to further strengthen our alliances with East West Bank, besides helping East West Bank with providing efficient digital banking services to its customers. We plan to use this collaboration as successful case and help all the commercial banks with their digital transformation process in a similar fashion going forward.

On the personnel front, we’re pleased to appoint Dr. Victor Li as our Executive Vice President, who is in line with our strategic shift to focus on growth of our technology service capabilities. In this role, Victor will oversee the daily operations of our business. Victor joined PINTEC in March 2019 and had previously co-chaired our international business division prior to this most recent promotion.

Victor is a senior entrepreneur, an IT industry veteran, with more than 20 years of experiences in building and commercialization state-of-art technologies. She has held multiple senior executive positions in both China and Australia and accumulated a complete handsome set of industry experiences in such areas as R&D, consulting, business development and management. Victor is passionate about choosing AI and Big Data technology, to help improving automation and analytics of our customers, business and operations.

In terms of licensing-related business, our current license, including internet micro-lending license, factoring, commercial credit reporting, fund sales and insurance brokerage, notably, our wholly owned Internet micro-lending subsidiary, Ganzhou Aixin has already successfully interfaced with PBOC’s Credit Reference Center. The approval of Aixin by the PBOC and the success of its subsequent interface with the CRC further improves — further proves our comprehensive risk management capabilities and restore a commitment to maintain the highest possible regulatory compliance standard.

Looking forward, we expect that our continued expansion of Aixin Financial Solutions and the refinement of Aixin’s products offerings will help us further diversify our revenue streams and expand our footprint in Internet micro-lending sector.

In order to expand our profitability and reduce our exposure to the risks, we also plan on winding down our loan facilitation business significantly in 2020. The epidemic severely impacted the per capital disposal income of Chinese customers in the first half of 2020, and we expected that this impact will increase the risk associated with the loan facilitation services in China and going forward. In responses to this trend, we have adopted an extremely cautious approach to manage our risks sharing loan facility service in 2020. As a financing service provider, with the most advanced technology capabilities and a fintech solution provider with the most practical financial service experiences, we have created a unique economic moat. Moreover, our ability to empower partner through technology innovation as well as our accumulation of financial service licenses continue to fuel our sustainability in the industry.

Going forward, PINTEC remains confident that this differentiated characteristics, along with our positive cash flow and efficient cost structure will enable us not only weather the current headwinds in the near future, but also capitalize on this market opportunity that will emerge following the epidemic.

With that, I will turn the call over to our CFO, Steven Sim, to review our 2019 financial results in more details. Thank you.

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Yuan Ning Sim, Pintec Technology Holdings Limited – CFO [4]

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Thank you, Allen. Hello, everyone. Before I start to review our financial results, please note that we have made the decision to appoint a new independent registered public accounting firm for the fiscal year ending December 31, 2019. As a result of the appointment, we have revisited our consolidated financial statements for the years ended December 31, 2017 and 2018 and identified certain material misstatements. In line with this discovery process, we decided to restate our previously issued consolidated financial statements for the years ended December 31, 2017 and 2018.

Furthermore, effective from January 1, 2019, we have adopted the guidance in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, using the modified retrospective approach and change our accounting method for revenue recognition in 2019 as a result. The adoption of ASC 606 and subsequent restatement mentioned earlier as well as other financial information, please refer to our full year 2019 earnings release distributed earlier today. In addition, please note that all numbers presented in the following remarks are in RMB terms.

Now let’s move on to our financial results for the full year of 2019. Our total revenues in the full year of 2019 decreased by 19.9% year-over-year to CNY 1.285 billion. The revenues from technical service fees decreased by 17% to CNY 1.077 billion from CNY 1.297 billion, in the full year of 2018.

During 2019, we began to share credit risk for off-balance sheet loans with selected financial partners. As a result, we generated risk-sharing technical service fee as part of our revenue from technical service fees in the full year of 2019. This update is in line with our recent business development and helps to provide investors with increased transparency surrounding our financial performance.

Revenues from installment service fees decreased to CNY 187.4 million from CNY 291.1 million in the full year of 2018. This decrease was attributed to the reduction in our on-book installment loan volume, which was in line with our ongoing strategy to refine our portfolio structure.

Revenues from wealth management service fees increased by 36% to CNY 20.1 million from CNY 14.8 million in the full year of 2018, which was primarily attributable to the steady development of our insurance solution offerings.

Cost of revenue in the full year of 2019 decreased by 29% to RMB 769.7 million from RMB 1.084 billion for the full year of 2018. The reduction was due to lower volume of company on-book loan business, which resulted in decreased funding costs and provisions for credit losses.

Cost on guarantee in the full year of 2019 increased to CNY 193.4 million as the company began to share the credit risks for off-balance sheet loans with a larger group of selected financial partners.

Service fee charged by Jimu Group in 2019 decreased to CNY 200.2 million from CNY 529.6 million in 2018. The decrease was primarily due to the adoption of a new cooperation model with Jimu Group since 2019, under which the company reimbursed Jimu Group for part of the losses under loans that we facilitated using Jimu Group as a funding source that were not recorded on our balance sheet.

Origination and service costs in the full year of 2019 decreased by 10.2% to CNY 290.4 million from CNY 323.3 million in the full year of 2018, primarily due to a decrease in user acquisition costs in connection with the decrease in volume of loans facilitated, which was offset by an increase in service fee for loan collection.

Gross profit in the full year of 2019 was CNY 515.5 million compared to CNY 518.9 million in 2018. Gross margin for the full year of 2019 was 40.1%, this compared with 32.4% in the full year of 2018.

Total operating expense in the full year 2019 increased to CNY 1.244 billion to — from CNY 507.6 million in the full year of 2018.

Let’s now review the breakdown of operating expenses in the full year of 2019. Sales and marketing expenses in the full year of 2019 decreased by 30.2% to CNY 69.6 million from CNY 99.7 million in the full year of 2018. The decrease was as a result of our ongoing effort to refine our product mix and wind down our offline personal installment loan business that — latter of which we began at the end of 2018.

General and administrative expenses in the full year of 2019 were CNY 1,095.3 billion, compared to — sorry, CNY 1.095 million compared to CNY 313 million in the full year of 2018. This significant increase was mainly caused by the impairment of CNY 890.7 million on amounts due from the related party, Jimu Group. We determined that the amounts due from Jimu Group were unrecoverable as Jimu Group has become insolvent and subsequently in February 2020 announced its exit from its online lending platform business with significant outstanding loan balances on its platform left unpaid. As a result, we have provided a full provision for these balances.

Research and development expenses in the full year 2019 decreased by 16.7% to CNY 79.1 million from CNY 95 million in the full year of 2018. This reduction was primarily driven by our effort to streamline our research and development operations.

Operating loss in the full year of 2019 was CNY 728.4 million compared to operating income of CNY 11.3 million in the full year of 2018.

Net loss in the full year of 2019 was CNY 906.5 million compared to net income of CNY 2.2 million in the full year of 2018. Total share-based compensation expenses in the full year of 2019 decreased to CNY 17.8 million compared with CNY 131.3 million in the full year of 2018. Adjusted net loss in the full year of 2019 was CNY 888.6 million compared to adjusted net income of CNY 133.4 million in the full year of 2018.

Diluted GAAP and non-GAAP adjusted net loss per ordinary share in the full year of 2019 were RMB 3.21 and RMB 3.15, respectively.

Now let’s come to our balance sheet. As of December 31, 2019, we had combined cash and cash equivalents and restricted cash of CNY 580.9 million compared to CNY 710 million as of December 31, 2018. Total net financing receivables, including short-term and long-term receivables, decreased by 41.8% to CNY 449.5 million as of December 31, 2019, from CNY 772.1 million as of December 31, 2018.

Admittedly, the impairment of the amount due from Jimu Group significantly impacted our income statement and generated a substantial net loss for us in the full year of 2019. However, it is important to note that our decision to eliminate our reliance on Jimu Group will allow us to enter a renewed growth cycle by focusing our efforts on risk-free technology services. These impairment charges were noncash and one-off. Our principal businesses remain healthy.

Excluding the total noncash provision for credit loss and impairment charge for investment, the adjusted net profit would have been CNY 202.1 million. In addition, full year of 2019, our net cash provided by operating activity was positive, further showcasing the sustainability and strength of our core business.

In December 2019, we announced a share buyback program to repurchase our ADSs for an aggregate value of up to USD 10 million. However, following this program’s initiation, we faced the immediate impact of COVID-19 pandemic. As such, to ensure that we’ll be able to overcome the related market challenges in the near-term and maintain our healthy cash position, we have suspended the share buyback program.

Looking ahead, we will continue to focus on the implementation of our cost control initiative to further improve our operating efficiency.

Our decision to scale down our risk-sharing loan facilitation services will inevitably impact our revenues in the short term. However, under the current market environment, we strongly believe that prioritizing technology services and reducing our exposure to risks will further — will provide better stability as well as better quality earnings and profitability in the long run. In addition, as a licensed-fintech service provider, we will leverage our hands-on service experience to assist our partners in digitizing their operations and access intelligent PINTEC services.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to Mr. Allen Dong. Please continue.

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Jun Dong, Pintec Technology Holdings Limited – Chairman & Acting CEO [2]

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Again, thanks, everyone, for participating in the conference call today, and we look forward to a strong year. Thank you.

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Operator [3]

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Thank you. Ladies and gentlemen, that concludes our conference for today, and thank you for participating. You may now all disconnect.