Hello, ladies and gentlemen. Thank you for participating in the Second Quarter 2023 Earnings Conference Call for FinVolution Group. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Jimmy Tan, Head of Investor Relations for the company. Jimmy, please go ahead.

Hello, everyone, and welcome to our second quarter 2023 earnings conference call. The company results were issued via Newswire services earlier today and are posted online. You can download the earnings release and sign up for the company e-mail alerts by visiting the IR section of our website at ir.finvgroup.com. Mr. Tiezheng Li, our Chief Executive Officer; and Mr. Jiayuan Xu, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session. During this call, we will be referring to several non-GAAP financial 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. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company's filings with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Finally, we post a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Tiezheng Li. Please go ahead, sir.

Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. This is Tiezheng Li, CEO of FinVolution Group. We are happy to speak with you today. Since our expansion into the Indonesian market back in 2018, we have continued to execute our local focus, global outlook strategy in the Pan-Asian region with unwavering determination. To date, we have cumulatively served our 28 million borrowers in China, Indonesia and the Philippines. By integrating our local business focus with an international perspective, we are able to leverage our expertise and insights derived from diverse markets to drive growth and foster innovation within our organization. We expect this strategy to produce further benefits as we expand into additional countries and strengthen our presence in our existing markets. As China transitions into the post-COVID era, our recent July macroeconomic data continue to be challenging with pockets of improvement in the certain areas. However, macroeconomic data from the Asian markets in which we operate currently pens a more positive picture, reflecting growth across different operational metrics. Given these circumstances, we are adopting a strategy of progressive growth in the China market while pursuing rapid growth in the international market. While we await the domestic macro environment recovery from the current challenges, we have been continuously investing in R&D. We have substantially enhanced our technology, enabling us to streamline our processes, upgrade our customer experience and achieve improvements across the various markets in which we operate. We are pleased to share that FinVolution's total transaction volume in the second quarter increased to RMB 47.3 billion, while our outstanding loan balance reached RMB 63.7 billion, up 14% and 13%, respectively, year-over-year. This growth validates our company's ability to efficiently adapt to the challenging economic landscape. We are continuing to meet the needs of our customers…

Thank you, Li, and hello, everyone. Welcome to our second quarter 2023 earnings call. In the interest of time, I will not go through all of the financial line items on this call. Please refer to our earnings release for further details. As Li mentioned, the domestic macro environment continued to be challenging with pockets of improvements in certain areas. The official manufacturing Purchasing Managers' Index came in at 49.3 points in July compared to 49 points in June, and 48.8 points in May, according to data released by the National Bureau of Statistics on July 31, 2023. Meanwhile, total social financing data in July increased by just RMB 528 billion, below market expectation. Total retail consumption in July only increased by 2.5% compared with the same period last year. However, despite the challenging macro environment, we are encouraged by the strong operational and financial results we delivered in the second quarter of 2023. Driven by our stable and better quality borrower base, we achieved solid operational metrics in the second quarter in the China market. Cumulatively, we have served over 24 million borrowers in China, with the number of unique borrowers at around 2.3 million or 5% sequentially. Additionally, our China transaction volume reached RMB 45.5 billion, while our outstanding loan balance reached RMB 62.6 billion as of June 30, 2023, both up 12% on a year-over-year basis. Bolstered by our prudent approach to risk management with proven fraud detection technologies, we have maintained a stable risk level. In the second quarter of 2023, our day 1 delinquency rate was around 5.6%, and the vintage delinquency rate is expected to be around 2.3% for the quarter. Finally, thanks to our loan collection team's impressive efforts, our loan collection recovery rate maintained stable at around 90%. As we continue to…

[Operator Instructions] Our first question will come from Yada Li of CICC.

I'll then now do my translation. This is Yada with CICC. And my first question today is about the asset quality trend. Considering the current macroeconomic conditions, what is the latest trend of leading indicators like day 1 vintage delinquency in July and August, and what can we expect going forward and how to affect our provision strategies? And my second question is related to the international business. And could you please give us more color on the updates such as the progress of business expansion in new countries, business model and long-term strategic focus?

[Foreign Language]

This is Jimmy. Let me do the translation for Alexis. Your first question is related to our risk assessment performance. As mentioned, our vintage delinquency performance is around 2.3% and it has always been around at 2.3% levels over the past few years, and our 30-day loan collection recovery rate is around 90%. And over the last few quarters, this metric has been relatively stable. And our vertical delinquencies has -- is at 1.68%, which is also at a low level. From observation, the current macro environment is relatively weak with recovery below expectation. And from observation, the credit market is doing okay, and we expect that it is going to maintain stable going forward, with risk performance staying stable as well. We have been through multiple credit cycles, including the COVID and the lockdowns, and we have proved that throughout all these cycles we have successfully navigated them and succeed after all these cycles.

[Foreign Language]

Let me do the translation for Alexis. As you know, we are already in leading positions in the Indonesia and the Philippines market. And apart from these 2 countries, we are also looking at opportunities in other countries in the Southeast Asia and also looking at -- for high-growth opportunities in countries such as the Africa and Latin America. Our business model is not only restricted to online lending. We are also looking at opportunities -- for example, we're also looking at opportunities in Indonesia for off-line consumption scenarios. And as you know, the populations in Indonesia is young, and we are working with leading mobile phone brands in the Indonesia market to target these borrowers for mobile -- offline mobile phone consumption.

Okay, Yada, do you have any further questions?

Our CEO would like to add a few more lines.

[Foreign Language]

Let me translate for Mr. Tiezheng. As you know, FinVolution was established 16 years ago, and we are very experienced in different business models such as online, offline and have very good working relationships with different partners. Some of the business models might not work in China market, but these are very useful experience for us when we penetrate into other countries. As you know, we are also not the earliest company to venture into overseas market, but we are in leading positions in Indonesia and the Philippines because of our tech capabilities, our operational capabilities. And also, we have a huge base of talent pools. And with these advantages, we are able to leverage the capabilities and [indiscernible] in our overseas market. And going forward, we are confident and expect further success in all these international markets.

Our next question will come from Frank Zheng of Credit Suisse.

The first one is a follow-up on the international market. From a medium-term perspective, for example, 1 years' time, how would you foresee the profitability of international market operations? And the second question is on domestic market. Do we have plans to further tap into prime customers with APR less than 18% in order to further expand the volume as well as improve the risk performance?

[Foreign Language]

Let me do the translation for Alexis. In the midterm, regarding our international market profitability, our international business is already profitable in the second quarter, but it is too relatively small compared to the China market. There are several reasons for this. Number one, it is affected by the rapid growth for our international business as we need to invest continuously. For example, our percentage of new borrowers in the Indonesia market is around 37%. And also, it has been affected by the deferred revenue because all these loans are conducted in installment loans.

[Foreign Language]

Let me translate for Alexis for this question. In the second quarter, we further optimized our pricing to 22.3% from 22.7% in the first quarter. As you have seen, we are continually trying to explore to acquire better quality borrowers. Through our historical experience, lower pricing helped us to attract better quality borrowers, and better quality borrowers will have a higher level of stickiness on our platform. And if you observe, we have also -- our ROE is also higher compared to the industry average. And in the second quarter, our ROE from our reported earnings was about 3.7%, and we have also optimized our funding cost structure by around 30 bps -- refunding 30 bps in the second quarter, and going forward, we will consider a balance between pricing and our ROE.

The next question will come from Alex Ye of UBS.

So my question is on the shareholders' return. So we are happy to see management announced USD 150 million of share buyback plan, which showcased management's focus on improving shareholder value. So if we look back to your track record on this buyback, how should we consider your pace on deploying such filter going forward? Should we consider the $150 million quota to be deployed over to your horizon as indicated by your authorization period? And also, is there any target payout ratio if we take into account both your dividend and buyback?

[Foreign Language]

Hello, Alex. Let me do the translation. Our share repurchase and buyback programs began in 2018, and we already have a few years of track record. And cumulatively we have returned about USD 260 million in the form of dividend to our shareholders and $230 million for share repurchases. In total, it is about $500 million returned to our shareholders. And the payout ratio if you calculate is around 30% to 40%. In terms of absolute amount, we are ahead of our peers. In the first half of 2023, our buyback amount is close to $50 million, and the payout ratio for our annual dividend was 18.5%. So the payout ratio for 2023 is likely to be higher than our average historical years. And as long as the market conditions allow and is favorable, we will continue to return value to our shareholders as validated by our past historical performance.

And our next question will come from Thomas Chong of Jefferies.

My question is about the competitive landscape in overseas market. Can management share your thoughts about the future outlook? And on marketing spending, given we talk about Facebook is one of our channels, can you comment about the customer acquisition cost in overseas versus domestic market?

[Foreign Language]

Hello, Thomas. Let me do the translation. As you have known, our operations are mainly in the Indonesia and Philippines market and the macro environment in these countries are relatively positive. For example, in Indonesia, the GDP growth has been growing at over 5% for the last 7 quarters. And in 2023, the GDP growth is expected to maintain at around 5%. The Philippines market is slightly slower compared to the Indonesia market, but the GDP growth is still growing at around 4.3%. And the reason why we are able to maintain our leading status positions in these countries are because we have deployed our technology capabilities and operational capabilities into these countries. And in the second quarter, our number of unique borrowers has also reached a new high at 786,000 and we are constantly among the top 3 players. These markets, Indonesia and Philippines, are huge markets and are at early stages for us. So we will continue to invest and maintain leading positions into these countries as supported by our technologies and operational capabilities. Our efforts and capabilities has also been recognized by local financial institutions. For example, this can be validated by the increase in the proportion of loans funded by local partners from 65% in the second quarter compared to only 39% in the same period last year. For sales and marketing, the amount we spent is around RMB 80 million has been invested into sales and marketing in the second quarter. And apart from Facebook, we are also investing into TikTok. We believe all these information fixed channels will be good channels for us to acquire our new borrowers going forward.

Do you have any other questions?

Thanks, management, for taking my second question. My question is about AI. In the prepared remarks, we talked about we have been investing in AI for many years and apply AI in different scenario. Given LLM, it's such a hot topic in the Internet sector these days, and people talk about LLM or industry LLM, I just want to get some thoughts from management with regard to this area, whether we are thinking of developing our own LLM or we are seeking a partnership with the top players.

[Foreign Language]

Hello, Thomas. Let me do the translation for Mr. Tiezheng. Honestly, the generative data model is not for a company of our size as it needs to be at a country level where that the huge resources are required for development. Our focus is on the implementation of AI models into our operations and to our daily operations in order -- in an attempt to increase our efficiency. And also, we will be looking at specific opportunities that are suitable for us for deployment into our business where we can also consider to work with other partners to increase our efficiency.

And the next question will come from Cindy Wang of China Renaissance.

This is Cindy from China Renaissance. So I have 2 questions. The first question is related to the overseas institutional funding. So we've seen the institutional funding testing going up pretty quickly. So in the midterm, what's the percentage contribution will be contributed from the institutional funding? The second question is related to provisions. So we see the asset quality has been improving in the second quarter. However, the provision compared to first quarter has been slightly up. So can we talk about what's the difference between here and whether we have any write-back in the second quarter? And how do we foresee the provision in the second half of this year?

[Foreign Language]

Let me do the translation. We have -- as mentioned, we have around 65% of funds -- 65% of the loans in Q2 was funded by local Indonesian partners in the second quarter, and we expect this amount to be around 80% by the end of the year. Going forward, we still think that there is opportunity for us to further increase this proportion, but our next focus will be on the funding cost where we need to do some optimization on our funding cost for the international markets. Going to the next question, when we did a look at the provisions, we need to divide into domestic and international provisions. The main reason is because our international business is growing at a very rapid rate. This is the reason for the provision levels to be higher. In the first quarter, there was a write-back. And now if you take a look at the domestic China recovery, the recovery is still weak and bit slightly below expectations. So we don't have any plans to write back at the moment, but all these will change when the economy is recovering at a faster pace. And there -- we believe there will be opportunities for write-back going forward.

At this time I would like to turn the call back over to the Company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact me or my Investor Relations team. Thank you so much.

This concludes this conference call. You may now disconnect your lines. Thank you.