OneConnect Financial Technology Co., Ltd.
Q2 2021 Earnings Call Transcript

Published: 7 Aug 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the OneConnect Second Quarter 2021 Results Conference Call. . I would now like to turn the conference over to your speaker today, Anita Du, Investor Relations Manager. Ma'am, please go ahead.

[Anita Du:]

Thank you. Thank you, Katherine. Hello, everyone. Welcome to OneConnect's Second Quarter Earnings Call. Joining me on the call are Mr. Ye Wangchun, Chairman and CEO of OneConnect; Mr. Luo Yongtao, CFO; Mr. Michael Fei, CEO of SME Banking; and Mr. Chen Xuhua, CEO of Gamma O. A few notes before we begin. First, you can download the earnings press release and presentation from the IR website. Second, our remarks today will include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements, except as required under applicable law. During this call, we may present both IFRS and non-IFRS financial measures. A discussion of the limitations of non-IFRS measures and the reconciliation of IFRS measures is included in the earnings press release. I will now pass it over to Chairman Ye. His remarks will be in Chinese. A translation in English will follow.

[Ye Wangchun:]

Hello, everyone. Thank you for taking the time to dial into the earnings call of OneConnect. Looking back on the second quarter, the business continued with its internal optimization in response to a rapidly evolving external environment. Our revenue grew steadily and net loss ratio further improved. I'm pleased to report that OneConnect was able to achieve a good performance by focusing on sales and product strategy, a result of our continuous effort to broaden customer engagement, which was a strategy laid out earlier in the year. The number of premium customers acquired in the first half of the year is already close to last year's total, establishing a solid foundation for our future development. The past 6 months have been frequent turmoil for the market. Although we saw changes in as early as 2020 and started to adjust our business structure by lowering revenue from business origination, the introduction of many new regulations and the strengthening of enforcement still took us by surprise. In particular, many financial institutions needed to upgrade their business models in areas relating to online marketing and credit data. Our business unavoidably took a hit amid the shift, and the impact is expected to perpetuate. As a result, it is appropriate that we lower the full year guidance. We are proactively addressing these changes by upgrading our products. Marketing and customer tools are now a sales solution that empowers financial institutions in the whole process, especially we can use existing data within financial institutions to help them boost the activities of existing customer base. Risk management service has been upgraded to an end-to-end solution incorporating system plus models plus products. Only in hard times can courage and perseverance be manifested, only after polishing canopies of. We have strong faith in the bright prospects of China's financial technology. With the series of regulations in place, the fintech service market will be more disciplined, which is good news for OneConnect potential upside. We will remain committed to the strategy of optimizing our business structure, upgrading our products and enhancing our customer base, thus boosting company value. In terms of optimizing our product structure, revenue contribution from business origination will continue to drop. The technological capability of our Gamma platform will be further boosted to drive recurring revenue from cloud services, risk management and operations support. In order to deepen customer engagement, we will shift from selling hook products to providing tech business support and enabling customers through end-to-end solutions. These efforts collectively aim to increase customer value and acquire more premium customers as well as customers with revenue contribution over CNY1 million. For the second half of 2021, we are confident that we can counter some of the regulatory headwinds; deliver fast revenue growth, especially revenue growth in third-party customers; improved net loss ratio by double-digit percentage points; and acquire more premium customers than last year. Thank you for your interest in OneConnect, and we look forward to your continued support. Thank you.

[Anita Du:]

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

[Luo Yongtao:]

Thank you, Anita. Good morning, everyone. As Chairman Ye said in his opening speech, the second quarter brought unexpected challenges. It is encouraging to see the team continue with the strategy to reinforce products and sales. Starting with the top line. Revenue increased by 25% year-on-year to CNY968 million in the second quarter. There was some slowdown in growth in this quarter. Let us go through the transaction activity first, which provide a good snapshot of the performance of our business. There are 3 main indicators that we look at

[Michael Fei:]

Thank you, Luo. Now let me offer more color on how we have been adjusting our operations in response to external winds. Page 15. We have shown how these new regulations affected has our business. The new regulations mainly target 2 areas, namely the use of personal information and the geographic scope of regional banks. Regarding the use of personal information, new regulations prohibit the direct connection of personal data between Internet platforms and financial institutions. Internet platforms collecting personal data are now required to obtain explicit approval from the users. As a result of this change, banks have to adjust their ways of approach in risk management to ensure compliance with the new regulations. Regarding the geographical limitation on regional banks, they can no longer accept deposits from or offer loan to clients located in regions where they have no physical branch presence. And also, they cannot offer their term deposit products through third-party Internet platforms. This new rule affects new business development through online channels for these regional banks. With our transaction-based revenue model, we have three major types of products affected by these new regulations, which are the

[Anita Du:]

Please stay with us for a moment. We are having some technical problems, and we will fix it out as soon as possible. Thank you.

[Michael Fei:]

Sorry, can you hear me?

[Anita Du:]

Michael, we can hear you. Please go ahead, please. Thank you.

[Michael Fei:]

Okay. Sorry. Yes, there's some technical problems. If we go to -- go back to Page 21, let me restart the page. Again, we want to reiterate our value proposition. Digital transformation for financial institution is a huge market and only started. We are the leading solution provider in the market, having served over 640 banks, 110 insurance companies and over 120 product client in overseas markets. We are uniquely positioned and we offer not only systems and tools, but also business know-how on how to best use these systems and tools to ensure a successful digital transformation. Although there are short-term headwinds as a result of tightening regulatory requirements, but we have anticipated this trend and proactively taking measures to upgrade our solutions. The examples we have introduced just now are not developed out of nothing. They have been launched in the past 12 months with tested successful client cases. This is why we can continue to deliver growth over 30% in both revenue and number of premium clients in the first half of this year despite all these regulatory impacts. And also, we are confident that in the medium to long term as the market is becoming more regulated, OneConnect is best positioned to further strengthen our leading position. Lastly, Page 22 in summary, we expect that the full year revenue growth will be no less than the growth rate we achieved in the second quarter of this year. We also stick to our original targets to improve our net loss ratio by double digits. Finally, we will stick to our original strategy of growing premium customers and deepen our wallet share with these premium and premier plus customers. We have achieved a good momentum in developing premium customer in the first half of this year, and we aim to continue that momentum in the second half. Thank you. I will pass it back to Anita.

[Anita Du:]

Thank you. Thank you, Michael. And sorry, everyone, for a technical issue. Operator, we are ready for the questions. Please open the line, please.

[Operator:]

. And speakers, our first question from Hans Chung of KeyBanc.

[Hans Chung:]

So my first question is regarding the regulatory changes. And then I just wonder, like, are we confident with -- the regulation have been like pretty much to come and then we just need to go through the changes in business model from client side. And when should we think about the bottom from a year-over-year growth perspective which -- I mean, which quarter should we think about the bottom? And then the second question is just I think since last quarter, you guys mentioned a lot of the new products, and that's encouraging. And then I just wonder when should we start to see the meaningful contribution from those new products. And then last question, just kind of high level, just given the changes in regulation and then are we going to see the different, I would say, the difference in base model? Specifically, I actually just want to know whether we will consider like maybe subscription-based business model versus transaction based. And that's all my questions.

[Anita Du:]

Thank you, Hans. Thank you for your question. Michael, can you take the first and the third question. And Luo, can you please take the second one? Thank you.

[Michael Fei:]

Yes. On the regulatory impact, we have just introduced, I think the regulatory tightening is mainly focused in 2 areas. One is the utilization of customers' personal information. And second is the geographic scope of the business development for those regional banks. And we have -- as we have stated in the -- just now, the impact will be mainly on 3 products. One is the online -- one is the Internet marketing services, the asset monitoring services and digital risk management services. The corresponding revenue for these products for the last year for 2020 was around -- was over RMB500 million. In the first half of 2021, we see significant impact on the Internet marketing products and the asset monitoring product. And actually, without this impact, the overall revenue growth in the first half of this year will be over what we have achieved last year, and the third-party revenue growth will be more than 30%. So we anticipate this policy change will continue to have impact on us for the second half of this year, especially also on the digital risk management product. That is why we actually have adjusted our revenue forecast. We believe the revised forecast have taken into account of the revenue change we have seen and anticipated.

[Luo Yongtao:]

Okay. For the second question, the revenue contribution of the new products have been reflected in our results already because, as I said, we factored in our anticipation of the policy tightening in the beginning of the year already, and we have started to the product innovation and upgrade. Just as Michael said -- mentioned in his presentation, the examples of our new solutions have improved to be successful in practice. I think if we don't have the -- if we didn't have the new products in place in the second half of the year, our revenue will be affected even more. We cannot see the growth rate we have so far. That's my answer. Thank you.

[Michael Fei:]

Yes. Hans, on your third question about the transaction-based revenue model. Yes, we know there will be a controversial whether we should go for a subscription-based or transaction-based revenue model. However, we still believe the transaction-based revenue model can better reflect our overall competitiveness, and we have confidence in the long-term market potential for this type of model. First of all, I think this is our core competitive advantage of combining technology and the business, which can give full reflects of our industry experience and benefit in spending. Secondly, we adopt the transaction-based revenue model because the market of the digital transformation in China is still huge. We see there's a huge potential in the market. But allowing our revenue with the usage volume, we can enjoy a great long-term growth potential. And thirdly, we still believe that in the promotion of SaaS service in Chinese financial institutions, the transaction revenue -- transaction volume-based revenue model is the most acceptable model for our customers. Of course, given the policy headwind that we have -- we faced, it does look that we may have better off this moment with the transaction-based revenue model, but we are aware of this volatility in the performance. And I think we will continue to review product by product and choose the best revenue model for each product.

[Operator:]

Our next question from Carson Lo of HSBC.

[Carson Lo:]

My question is more on the cloud service. So now cloud service has account for around 27% of the total revenue this quarter. So can management first -- first question is, can management update us on the progress on penetrating -- promoting or penetrating the cloud service to third-party customers beyond Ping An Group? And second is we look that there is new regulations or potential regulations on the registration of the financial cloud service provider, especially on the service provider that they need to -- that financial institutions are -- can only -- going forward can only subscribe to the service that are registered already. And then the registration requirement for the services provide seemingly relatively high, the requirement are relatively high. So can management elaborate a little bit on this front? And then what is the impact to our R&D on this on the cloud service side?

[Anita Du:]

Thank you for your questions. Michael and our CEO of Gamma O, Chen Xuhua, will take your question.

[Chen Xuhua:]

You just asked about the third-party customer penetration of cloud service platform in the second quarter. We're happy to report that we've added -- newly added 5 third-party customers in the second quarter. In the -- as of the end of second quarter, overall, we have acquired 36 contracts in total, which is about CNY60 million in value. So for the second half of the year, we will continue to focus on external expansion. The regulators remain cautious on the financial cloud service model as the model is charging based on usage. Therefore, for third-party customers, their volume is still smaller compared with the volume used by the Ping An Group. That explains the lower revenue contribution from the third-party customers, and that's why we will focus more on external expansion. And you also mentioned about license and registration from the -- letter and registration requirements from the regulators. We are now going through the process of security validation, and we are among the first companies to carry out this process. And we expect that in the second half of this year, we will have clear guidance from the regulators. The regulatory registration is a 2-step process. Firstly, we need to finish the security validation at a departmental level, which is expected to wrap up at the end of August. And then after this process, we will continue the registration process to -- at the central level. In the second half -- we expect that in the second half of this year, we will finish the BCTC registration. Ping An is one of the first companies to finish this. And at mid-September, we believe we will finish the registration for Internet financing. And we are also one of the first companies to complete that as well. For now, we see that we are in compliance with all the validation requirements but the project has been completely finished, so we -- but we remain optimistic. We have finished the cloud infrastructure registration at the SEC, and we are now qualified to provide services to all -- its all regulated financial security institutions in China.

[Operator:]

Our next question from Ethan Wang of CLSA.

[Ethan Wang:]

Management, I have two questions. The first one is on cash. So I noticed that a actually profit and cash balance. So do you even need to further raise capital in this issue? And the second question is on the midterm goals we've been mentioning since our IPO. So under the new regulatory environment, do those midterm goals still stay the same? Or is there any changes to that?

[Anita Du:]

Luo will take your first question, and Michael will take your second question.

[Luo Yongtao:]

Okay. The first one, in terms of cash, we have cash and equivalent on our book of about CNY1 billion at the end of the second quarter. So -- and plus, we have short-term investment financial products, about CNY2 billion. So in total, we have our cash plus equivalent assets about CNY3 billion. And I think it's in a very good position for our operation. So I think there is no need for -- at the end of the second quarter for any raising money issue. If we have any further decisions, we will disclose our decision. Thank you.

[Michael Fei:]

Yes. On your second question, we remain committed that in the midterm, we will have over 1,000 premium customers, and we will be breaking even by the term. That is our commitment during our IPO, and we remain committed to that.

[Operator:]

Your next question from Piyush Mubayi of Goldman Sachs.

[Piyush Mubayi:]

Could you talk through a couple of areas. One is in the cloud business, what sort of gross margins are you running? And what is the implication of the gross margin or the overall profitability of the business and the path to profitability that Michael just described? The second is on the international side. Could you talk about where you are? Can you accelerate that further from where your business is positioned today, and what is the sort of base of acceleration we can see? And then the third is with all of the changes we've seen in the regulatory front, if you could look at your business in your 25% growth rate, if you could just spell out how much of that slowdown is regulatory-driven, and how much of it is otherwise in terms of what the change in guidance is for the year? And how confident are you to -- my fourth question on being able to do 25% overall growth rate for the next -- for the second half of the year based on the guidance that you have just given out?

[Anita Du:]

Michael, can you take the second question first, and then Luo will take your first question.

[Michael Fei:]

Sorry, just to confirm, what is the second question?

[Piyush Mubayi:]

International.

[Anita Du:]

It's about the international business.

[Michael Fei:]

And the -- what about it?

[Piyush Mubayi:]

The rate growth of the international business.

[Michael Fei:]

Okay. Yes. Okay. Yes, there's a growth of international business. Our international business, I think these are two parts. One is our business in the Southeast Asian market. The second is the virtual bank, the PAOB. On the south -- our business in Southeast Asian market, it's still very, very strong growth, much, much higher growth than what we have achieved in our domestic market. And we also have a very good customer signings for the first half of this year. But unfortunately, the percentage, because they have a small base, so it's still a single-digit percentage in terms of our total revenue contribution, but very, very good, very healthy growth. Now of course, there are some impact due to COVID. But we are -- I think we are working hard to increase our team in the Southeast Asian market and increase also our product offerings in the market. Another part of the business is our virtual bank, the PAOB. Well, future in Hong Kong, you actually -- of course, I think you read all these news about virtual bank In Hong Kong and the Hong Kong may also published the financial performance of all these virtual banks. I think our virtual bank, the PAOB, is unique that is focused on the SME lending. We see strong momentum of this SME loan growth. And also, so far, as we have seen, there is no single overdue loan for the -- ever since we launched the business. So we are quite confident about our asset quality, our risk management capability. And also, we are confident about our capability to improve our net interest margin.

[Luo Yongtao:]

Okay. Yes. I'll take the first question on the gross margin. The gross margin dropped from last year's 38% to 34%. I think the drop is due to the new product launches, including the cloud services platform because all these products are in their early stage, and we have to have more input on expenses to accelerate the revenue of the product. Overall, the -- because you know the competitiveness of the cloud business is very intensive. So the gross margin is not high as our other products. But I think with the time we move on, we have our products more, more mature. The profitability, we will go up gradually. Yes. Thank you.

[Piyush Mubayi:]

Does that gross margin improvement come from -- does the gross margin improvement come from the mix change or just from cloud becoming more -- a higher gross margin business with time?

[Luo Yongtao:]

Yes. The high-margin products, for example, like the risk management, our auto insurance claim solutions.

[Piyush Mubayi:]

Right, so the mix will change.

[Michael Fei:]

I think there's still a question about this -- the growth. I think Piyush asked about the impact of our 25% growth in the second quarter. I think, as I mentioned earlier, there are three major products that are impacted by the new regulation change. The Internet marketing related services, the asset monitoring services and the risk data services. And the total revenue of these 5 products in last year, 2020, was about over RMB500 million. And for the first half of this year, the impact was mainly on the first two. That was Internet marketing services and the asset monitoring services. We have a decline of CNY170 million revenue for the first half of this year as a result of these two products. So if you're taking out of the impact of these 2 products, our revenue growth for the first half was actually higher than what we have achieved last year, it was also higher than what we have committed earlier this year. And looking in the third and fourth quarter based on our current outstanding of the revenue change, we will see a bigger impact on the third product. I mean, I just mentioned, that is a credit risk data services. So that is why we have decided to adjust on the forecast for the full year, except for these 3 products. The other products are actually growing quite good. As you can see, either risk management, operations as well as the cloud services. We have seen very good momentum there, very good growth. That is also gives us confidence of our full year growth momentum.

[Operator:]

Our last question from Alex Yao of JPMorgan.

[Alex Yao:]

A couple of housekeeping questions. Number one, does the cloud modern structure different between Ping An revenue source and non-Ping An revenue source? And then secondly, in terms of non-Ping An cloud revenue or business development, what are the key areas of future revenue potential from industry perspective? Is it more on the banking side, more security, more for example, funds industry.

[Anita Du:]

Michael will take both of your questions.

[Michael Fei:]

Yes. On the margin structure for Ping An and the non-Ping An, they are actually quite similar because we have to have affluent relationship with all these Ping An transactions. So we have to have this market-oriented pricing for Ping An and non-Ping An customers. Of course, there will be still scale impact because the Ping An is a much larger customers, they have a much larger transaction volume. So if you -- on average, I think on a per transaction basis, the Ping An services will have a better margin compared with those third-party clients who is still in the initial stage, relatively small in terms of transaction volume. And on your question about the growth potential, we believe banking will still be the largest potential area for cloud services just for -- because this banking has over 80% -- 70% to 80% of the total assets of the China financial industry. So banks will be the largest growth area, opportunity area for cloud services.

[Anita Du:]

Thank you, Michael. I think that sums up our earnings call today. Thank you, everyone, for joining the call today. We look forward to speaking with you again. Thank you.

[Operator:]

This concludes today's conference call. Thank you all for joining, and you may now disconnect.