Qudian Inc. (QD) Q4 2018 Earnings Conference Call Transcript

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Qudian Inc.  (NYSE:QD)Q4 2018 Earnings Conference CallMarch 18, 2019, 7:00 a.m. ET

Contents:
Prepared Remarks Questions and Answers Call Participants
Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for Qudian Incorporated’s Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded.

I will now turn the call over to your host, Ms. Annie Huang, Director of Capital Markets for the Company. Annie, please go ahead.

Annie Huang — Director of Capital Markets

Hello, everyone; and welcome to Qudian’s Fourth Quarter and Full Year 2018 Earnings Conference Call. The Company’s results were issued via newswire services earlier today and were posted online. You can download the earnings press release and sign up for the Company’s distribution list by visiting our website at ir.qudian.com. Mr. Min Luo, our Founder, CEO; and Mr. Carl Yeung, our CFO, will start the call with their prepared remarks.

Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company’s results will be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company’s 20-F is included in the Company’s 20-F as filed with the US SEC. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Qudian’s earnings press release and this conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Qudian’s press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

We also posted a slide presentation on our IR website providing details on our results in the quarter and the full year 2018. We will reference those results in our prepared remarks but will not refer to specific slides during our discussion.

I will now turn the call over to our CEO, Min Luo. Please go ahead.

Min Luo — Chairman and Chief Executive Officer

Thank you, Annie. I want to continue to thank all investors, analysts and media, who have taken the interest to join today’s call. I have fine results to share. Then Carl Yeung will take you through more detail. We ended 2018 with another record quarter with RMB778.8 million of non-GAAP net income and achieved our (inaudible) target set in the beginning of 2018.

If we exclude foreign exchange loss and charges from one-time scaling down of Dabai Auto business, our underlying profit was RMB850.2 million for the quarter, a record quarterly earning for us. Throughout 2018, the market had all kinds of concerns, but it is (inaudible). Thanks to our solid execution and our institutional funding and user scale (ph) as well as very early efforts in beginning regulatory compliance. I’m encouraged that we achieved quarterly operating and financial results while operating under legal annual interest rate and continued to disprove this contract.

And for 2018, we added I believe we delivered into what we said. First our massive user base continues to grow vis-a-vis operate, manages. Our registered users grew to 71.8 million, and outstanding borrowers grew to 5.3 million since the end of the last quarter despite what has been too soft. User engagement through Alipay’s, dedicated channel for online third-party service provider, officially ended in August 2018. So the fourth quarter was the first complete quarter without lists of credits (ph). Yet our registration and active outstanding borrowers continued to grow from the third quarter. This proves that an innately affordable and attractive service doesn’t require costly marketing or special channels to successfully grow. For the year, as a result of our commitment in delivering risk-adjusted returns and a conservative risk management approach, our asset quality was tact within our capital levels.

During 2018, we made several carefully calculated management decisions to make sure asset quality was obtainable. First, we remained selective in several new users in light of increased delinquency and elevated credit risk in the industry during early 2018. Second, we prolonged the loan tenure for high quality borrowers with solid backlog while decreasing the loan size in line with their income growth, and making sure monthly repayment remain affordable. For example, average monthly principal and fees repaid in the fourth quarter was around RMB600. And the like new (inaudible) borrower default until it’s losing and affordable credit line, and gets that credit record its loans. Third, we do not provide adequate loans. On first pay, the borrower is late, the entire credit line is taken away. And finally, thanks to all — to our fully licensed this is, institutional funding structure, the majority of loan relationships are legally between licensed (inaudible) and the followers therefore, delinquency are reported to PBOC (inaudible) for these borrowers for the first time, a strong incentive not rely on the payment.

On regulatory risk, there were various new regulations and the guidance issued in 2018 for Internet finance. Yet we are the first in the industry to shift from being a direct lender to being a pure platform, assisting loans between borrowers and licensed institutional funding partners with annual interest rate pack under legal path (ph). Therefore there are no material regulatory uncertain swaps. We successfully spent our population with existing funding partners in full — in funding size and scope, and secured 19 new funding sources compared with a year ago.

Looking into 2019, we are confident about our earnings outlook through active regions in our existing user base and the available funding. Yearly income related to risk taking, we are excited by the prospect that we move our balance sheet as a goal of change. As you may recall, we launched our traffic referral channel in the third quarter to referrals excess borrower checking through other lending and a compliant Internet financial service providers. The fourth quarter saw encouraging development in terms of revenue contribution of RMB30 million.

In addition to traffic referral, as part of our open-platform initiative. We recently started to refer transactions that we cannot fund through our licensed institutional lender partners, where we do not — where we do no undertake any risk other than a greater margin compared to traffic refer. Finally, with a clear focus on our core consumption finance business, we will continue to explore emerging opportunities to keep our team challenged with cost, managed within our target. I’m confident we are well-positioned in delivering long-term growth for our shareholders.

With that, I will now turn the call over to our CFO, Carl Yeung, who will discuss more about our our operation.

Carl Yeung — Chief Financial Officer

Thank you, Min; and hello, everyone. First, I’d like to touch base on a couple of highlights for the quarter and full-year 2018. 2018 marked another milestone for us as we achieved our guidance, while operating under the regulatory compliance APR cap. We achieved a non-GAAP net income of RMB2.55 billion after investment in new opportunities, and solid execution of our $300 million repurchase program, a clean delivery of what we guided at the beginning of the year. Moreover, if we excluded some non-operating charges of underlying profit for 2018, reached RMB2.68 billion, substantially ahead of our RMB2.5 billion guidance. Our solid results were attributable to our growing user base, low operating costs, regulatory compliant operating structure and solid asset quality.

In 2018, our loan book saw growth of 69.9% year-on-year, and this further demonstrated the strong demand from our users with reliable funding to serve. In addition, our asset quality remained healthy throughout 2018, validating management’s decision to lower the management’s decision to lower the risk exposure of our loan book in light of increased delinquencies and elevated credit risk in the industry during early 2018. Our vintage delinquency rates slightly increased as loan tenure increased from 2.5 months in 2017 to 8.1 month in 2018 for our high quality users. We were delighted to see our outstanding borrower base reach 5.3 million following the termination of paid marketing on Alipay, while our sales and marketing decreased 49.4% year-on-year for our core consumption finance business. This again proves our capability in sustaining users growth without relying on expenses largely (ph).

Looking into 2019, our outstanding loan balance have grown to RMB22 billion by March 15, 2019. Therefore, we are well on track to achieve our full year non-GAAP net income guidance of RMB3.5 billion, excluding non-operating costs and charges. Qudian is committed to delivering shareholder value. Therefore, the Company will continue to undertake new challenges, investments where we believe further new growth may emerge in addition to helping to keep our talent base challenged, sharp and intellectually growing. We shall do so responsibly with the priority that our core consumption finance operations are not interrupted and targets delivered.

One example is in 2018, with meeting earnings guidance as our top priority, we quickly scaled back Dabai Auto business when macro auto sales were slowing in order to reduce overhead and avoid potential risk exposure in asset residuals. Another example is the successful launch of our open-platform initiative. During its inaugural operations in the fourth quarter of 2018, open-platform contributed RMB30 million in revenues, carrying no material cost of operation on our dormant user base. We’ll look to invest in production further by launching various services to activate or attract high-quality potential borrowers or our partners. These initiatives demonstrated our Company’s execution strength and our focus. Looking ahead, any excess capital that cannot be deployed for value will be returned to our shareholders via buybacks or other shareholder value enhancing means.

Now, let me share with you some key financial highlights. In the interest of time, I will not go through the line items one by one. For more detailed discussions of our fourth quarter and full-year 2018 results, please feel free to refer to our press — earnings release just issued earlier.

Total revenues for the full year 2018 increased by 61.1% to RMB7.69 billion, mainly driven by strong growth in our loan facilitation income, from off-balance sheet transactions, and a ramp up of Dabai Auto business. Non-GAAP net income for the full-year 2018 increased by 14.4% year-on-year to RMB2.55 billion or RMB7.92 per diluted ADS.

Particularly, I want to highlight that our underlying profit reached RMB2.68 billion for the full-year 2018, if we were to exclude the financial — foreign exchange loss of RMB90.8 million, and a specific charge of RMB37 million incurred by scaling down of Dabai Auto business.

Our asset quality was stable. 2018 provision for receivables increased by 94.8% to RMB1.18 billion. This was primarily due to an increase in weighted loan tenure from 2.5 months to 8.1 months during 2018.

We will continue to benefit from word of mouth marketing by providing a better and more affordable product offering. Following the termination of engaging users through t

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