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Yintech Investment Holdings Limited (NASDAQ:YIN)
Q2 2019 Earnings Call
Aug 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Q2 2019 Yintech Investment Holdings Limited Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Yvonne Young. Please go ahead, ma'am.

Yvonne Young -- Investor Relations Director

Thank you, operator. Hello everyone and welcome to Yintech's second quarter 2019 earnings conference call. Our earnings release was released earlier today and is now available on our IR website.

On the call today from Yintech are Mr. Wenbin Chen, Chairman and CEO; Mr. Raphael Qian, CFO; and myself, Investor Relations Director. Mr. Chen will review business operations and company highlights, followed by Raphael Qian, who will go over the financials and the guidance. We'll all be available to answer your questions during the Q&A session that follows. Questions can be asked in English or Chinese. If you ask your question in Chinese, please translate into English yourself afterwards, or I may have to do the translation.

Before beginning, we would like to remind you that discussions during this call contains forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that may cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yintech's filings with the US Securities and Exchange Commission. Yintech does not undertake any obligation to update any forward-looking statement, except as required under the applicable law.

During the call today, we will 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 the US GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

I'll turn the call over to Mr. Wenbin Chen. Mr. Chen will give his remarks in Mandarin. I would translate for him. Mr. Chen. Go ahead.

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

[Foreign Speech]

Thank you, Yvonne, and thank you to everyone, for joining in today's conference call. In the second quarter, we remain focused on strategic priorities of growing our core business and executing with excellence. This, combined with corporate client engagement led to the strongest quarterly financial and business growth for our core business. Since the fourth quarter of 2017, despite the serious headwinds we faced in the quarter, including a challenging mix of geopolitical economic dynamics, Asia [Phonetic] market volatility and weaker than expected investor conference amid the unsettled US-China trade tensions.

Our net commissions and fees generated from five core business. Under commodities and securities services reached RMB309 million representing an increase of 41.8% year-over-year and 25.4% quarter-over-quarter. Revenues from commissions, interest income and other revenues were RMB329 million, a 21.9% higher than our high end guidance. Trading losses were RMB40 million, 42.9% to 60% lower than our -- higher than our previous guidance.

[Foreign Speech]

In the second quarter we continued to optimize our business and enhance our bottom line. Our ongoing focus on driving efficiency, while managing our spending in a disciplined manner enabled us to further improve ratio of expenses, drive operational leverage, and ultimately improved earnings. We're encouraged to see our net revenues from five core businesses increase by 41.8% year-over-year and 25.4% over the last quarter, whereas our total cost and expenses increased by only 4% and 7% respectively.

Our net loss attributable to ordinary shareholders from five core businesses represented a substantial decline from the first quarter and we nearly broke even for our core business on a GAAP basis. Please refer to GAAP and non-GAAP reconciliation in earnings release.

Now let's turn to our business progress in the quarter.

[Foreign Speech]

Firstly, our commodities services business. Our gold TD and futures commodities, both grew and contributed to the trading volume of RMB489.8 billion, an year-over-year increase of 20.8% and quarter-over-quarter growth of 55.3%. Net commissions and fees reached RMB175 million representing a year-over-year and Q-over-Q increase of 33.9% and 41.3% respectively.

[Foreign Speech]

I'm sure many of you might have noticed that the spot price moved beyond many years price range and reached a six year high since the end of May. In view of the current concerns over the slowdown in economic growth and further quantitative easing money to qualities of the major developed economies in the world. The geopolitical uncertainty and the continuously tough trade disputes. We believe that gold will gradually return to it's currency functions, and we are expecting a medium to long term polish [Phonetic] market for spot gold. As such, we have engaged more efforts on providing professional financial support to our clients, helping clients make investment gains. Since then there has been a significant increase in the growth of new clients or the activities of old clients. The increase in client asset in June as compared to May increased by 24%. And that increase was even more significant in July and August.

[Foreign Speech]

Now moving on to the security services. In the second quarter, the client trading volume of overseas securities brokerage was RMB81.8 billion an increase of 80.6% from the previous quarter. Net commissions and fees of security services were RMB134 million, an increase of 53.5% year-on-year and 9.3% quarter-on-quarter mainly attributable to the strong growth of the overseas securities brokerage services. Commissions on overseas securities brokerage increased by 204.45% year-on-year and 70.8% quarter-on-quarter. The quarterly ARPU is more than full growth of the industry average, primarily due to our expertise and professional service as well as a strong marketing capabilities.

We believe with -- also our core competitive advantages [Indecipherable]. Compared with the emerging tax driven online brokers, many of our middle and senior management team members, our senior investors themselves, they also having engaged in the financial advisor industry for many years and as such they have a very deep understanding over the market and individual investors. This provides us the capabilities to seize opportunities ahead of the market dynamic and deliver effective services to clients, increase the assets value.

[Foreign Speech]

In terms of our financial advisory and investor education services. We actively response to policies in helping investors to create this professional management knowledge and capabilities, such as the financial interpreted financial reports, interpretation services, we provide to our clients. We are investing in building up our own investment service search system and improving our financial analytical capabilities. With that, we have also invested in a large number of capital, in purchasing the research reports of well-known brokers and well-known securities firms and interpreted to investors in a easy to understand way to help them gain knowledge on one hand and processed risk identification capabilities on the other hand, with an aim to be the clients to transform into professional investors.

At the same time, we have developed innovative financial review for a variety of financial products, delivering the right investment ideas in a relaxed and pleasant way, enabling investors to gain companionship and enjoyment while acquiring knowledge. Every day, we actually are practicing the concept of making investment simpler, a more professional and more interesting.

[Foreign Speech]

Now, moving on to our asset management business. We are flattened to see that our strategic deployment, asset management and our prioritization of solid performance over pure scale and commercialization has paid off. In the third quarter, our asset management company contributes -- continues to gain industry recognition from a number of well-known institutions. For example, in the performance evaluation ranking among thousands of PE companies with AUM of RMB1 billion to RMB2 billion, our asset management company, is one that received recognition by wins [Phonetic] for its outstanding performance in the first half of 2019, including the Top 10 of best of performance PE companies, the Top 20 best [Indecipherable] strategy PE performance and the Top 20 PE performance with funds oriented strategy, maintaining its continuum of remarkable achievements in the first half of 2019. Throughout the first half of the year, our asset management business generated total revenues of RMB147 million.

[Foreign Speech]

We have been committed to the combination of financial research and technology called innovation, and it's integration into our products. At present, we have more than 100 patented technologies and have established a team of 130 young talents with an average age of the 28 years old. Most of whom are from Tier-1 financial technology and Internet companies, after eight years of accumulation of [Indecipherable], we have formed a team of first class technical experts in the field of call center system, secondary market data collection and distribution, market analysis terminal, quantitative indicator models, trading system construction infrastructure [Phonetic]. And in term our customer oriented mobile terminal product, we have have launched more than 10 APPs covering stock, futures, gold, Hong Kong and US stocks for users.

And build up our mobile Internet traffic metrics. The mAu of our APP, is around 470,000 to 650,000 plus Internet marketing tools such as WeChat. The total mAu and [Indecipherable] is more than 1 million. We have continued to invest in R&D to strengthen our innovation of financial technology, driven by cutting edge technology such as AI, Big Data, 5G, etc. We'll continue to refine our products and services, so that more users can join fast, timely and a full scale of investment services.

[Foreign Speech]

In addition under the current market conditions, maintaining asset light business model and effective capital management remains one of our top priorities, as we aim to maintain a property to liquidity to support anticipated business management. As of the end of June, our cash and short term investments available for corporate use increased to a healthy level of RMB1.86 billion and our total liabilities to total assets were merely 23%, leaving us a central room for further organic expansion as for exploration of M&A opportunities on the investment in innovation.

[Foreign Speech]

In addition to our investment for growth, we continue to return excess capital to shareholders in Q2. This includes US$250 -- US$250,000 of share repurchases, in line with our plan to complete our US$20 million authorization of roughly one year. As of the end of Q2, we repurchased 18.4 million shares or 3% of our total shares outstanding.

[Foreign Speech]

Looking ahead, in the third quarter our strategic focus is to try to find clients to lever and take advantage of the favorable market opportunities, while sustaining our business growth will implement for automation of customer centric strategies from aspects of the mechanism, management, technology, R&D and products to improve service quality, to drive this new growth efficiently, at the same time ensuring full compliance and superior risk control. We believe this initiative will help us to capture greater market opportunities as investor sentiment and industry recover.

[Foreign Speech]

With that, I will now turn the call over to Raphael Qian, our newly appointed CFO to discuss our financial results for the second quarter. And to provide guidance for the third quarter. We expect Qian joining us half a year ago and has helped in understanding into our companies strategy, financial situation and the business. We believe his participation will help the company achieve the next stage of growth. Mr. Qian, please.

Raphael Qian -- Chief Financial Officer

Thank you Mr. Chen. I'm very excited to join the company and looking forward to working with Mr. Chen and the team to deliver the next phase of growth. Hello, everyone. I'm glad to speak with you on today's call. We delivered another quarter of strong business and financial results. If excluding the trading gain and losses, which is more volatile with market dynamics, we did an apple-to-apple comparison with our core business Y-o-Y and Q-o-Q basis, and we are very happy to report that we nearly achieved breakeven.

We grew assets and invested to drive growth, while still delivering operating leverage, as a result we are pleased with these results and we will continue to focus on extracting our strategy.

Let's now review our Q2 business results in great depth. We've finished the quarter at RMB289 million in total revenues, up by 10% sequentially, driven by the strong demand in our commodities and the security services. If you look simply at the net commissions and the fees generated by our so to call product lines, which was RMB309 million, representing an annualized growth rate of 41.8% and 25.4% from the previous quarter. This comprised 56.6% of commodities related business and the 43.3% of security related business. Total customer trading volume was RMB571.6 billion, up by 39.8% year-over-year and the 5 -- 58.5% from the previous quarter. 85.7% of which was from commodities and the rest was from securities. In fact, if you read from commodities and overseas securities, brokerage services for the quarter were 0.036% and 0.053% respectively, within the reasonable range of movement if you compare year-over-year and the quarter-over-quarter.

Now, turning to our expenses, they were RMB328.1 million, an increase of 4.3% year-over-year. And a 7.1% from the previous quarter. However, if you compare the growth of revenues from our core business -- advantage of scale was clear to see. As we demonstrated a strong growth in our total net commissions which increased 41.8% Y-over-Y and 25.4% Q-o-Q. As a result, our net loss attributable to Yintech for the quarter was RMB55 million compared with net loss of RMB48.5 million in the same quarter last year, and the net income of the RMB69.2 million in the previous quarter. Non-GAAP net loss attributable to Yintech for the quarter was RMB42.1 million compared with net loss of RMB31 million in the same quarter last year and the net income of RMB85.6 million in the previous quarter.

Diluted loss per ADS for the quarter was RMB0.76 compared with diluted loss per ADS of RMB0.66 in the same quarter last year and the diluted earnings per ADS of RMB0.92 in the previous quarter. Non-GAAP diluted loss per ADS for the quarter was RMB0.58 compared with non-GAAP diluted loss per ADS of RMB0.42 in the same quarter last year. And the non-GAAP diluted earnings per ADS of RMB1.14 in the previous quarter.

As of June 30, 2019 the company had RMB1,858.2 million equivalent to US$217.7 million in cash and short term investments compared with RMB1,753.2 million as of March 31, 2019.

Now we are talking about the business outlook. Based on the information available as of the date of this press release Yintech provides the following outlook for the third quarter, which reflects the company's current and preliminary review and is subject to change. Revenues from commissions, interest income and other revenues will be in the range of RMB380 million to RMB400 million. While revenues from trading gains and losses will be in the range of net RMB10 million to RMB30 million. This concludes our prepared remarks for today.

Operator, we will now open the call to questions. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question comes from Lew Lily [Phonetic] with JP Morgan.

Lew Lily -- JP Morgan -- Analyst

Hi, Mr. Chen and Mr. Qian. Thanks for taking my question. This is Lily with JP Morgan. So I have few questions regarding your asset management business. So from the introduction, I know that this business is relatively new to your group. So could you please introduce more about it -- your asset management business. For example, the statistics of our products and your current AUM. And also, I'm quite curious about your target and plan on this new business line going forward. Thanks.

Yvonne Young -- Investor Relations Director

Thank you Lily. Let me translate it for Mr. Chen, first. [Foreign Speech]

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

[Foreign Speech]

Yvonne Young -- Investor Relations Director

Thank you. Let me translate.

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

Currently, we have launched 13 products with total AUM of RMB1.4 billion and including eight loan only equity for that. We see a size of RMB700 million and then three convertible bonds for that with a size of RMB800 million, and then one mutual strategy for that one product with a total size of RMB100 million. To note, we launched the first CD product in July 2018. We believe we are the first mover on this product among the similar competitors in China with a relatively large team and with good performance, as we introduced the 30th. Well, in the meantime, we highly emphasis on compliance and risk and we paid a lot of attention and effort on refining our management, on increasing our AUM and also on maintaining sustainable performance for all of our equity and the convertible bonds further in order to better serve our clients. So our profit [Phonetic] for the assets management business is for one maintaining a sustainable performance growth. And two, is to create absolute returns for our clients. Lily did we answer your question.

Lew Lily -- JP Morgan -- Analyst

Yes. Thanks for the detailed and clear answer. Thank you very much.

Yvonne Young -- Investor Relations Director

Thank you.

Operator

Thank you. And the next question comes from James Chang with Jersey [Phonetic] International.

James Chang -- Jersey International -- Analyst

Okay. Thanks for taking my questions. Congratulations for a great quarter. I would like to have a question for Mr. Chen. Given the macro backdrop has been quite volatile over the past few months and you said in your call. I was hoping to hear your perspective on how you are seeing at this point in the year about the market and how it's going to impact your business. What are the underlying opportunities or risk to you? And I have another question to Mr. Qian about your expenses. It is good to see your opex percentage decrease substantially on yearly and quarterly basis. Can you give us some colors on how you're going to manage your costs going forward? And do we expect the same level, of cost declines? What are the normal run rate for you? As many Internet critics brokerage firms spending heavily on acquiring customers, what is your study then? Do we expect some significant pickup on spending in line with your anticipated growth rates, especially when market is trending more bullish. Thanks.

Yvonne Young -- Investor Relations Director

James, thank you very much for the question. That's a very good one for us. Let me translate for the benefit -- let me translate first for our Chairman and CEO. [Foreign Speech]

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

[Foreign Speech]

Yvonne Young -- Investor Relations Director

Let me take a moment to translate for all investors.

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

Well, yes, as you just now mentioned and also I cited in my speech, just now, that we are reaching [Phonetic] the high volatility of the overall market from both political, economic and capital markets perspective. And then secondly, we have seen that China is on transitioning from the -- from highly emphasis on speed to emphasis on quality goals. This is a very significant transform in China. So based on the macro international environment and also China's economic transitioning, we think that in the future the markets will continue to experience high volatility. And then how this is going to impact our business and as such, macro backdrop, I'd like to share my understanding with you for our five of the products as well as the opportunities we see, and that is the market conditions.

And as you know that we have five products in mind, including spot commodities and securities services. Under the spot commodities, we have spot gold commodities and futures gold commodities. And then under the category of securities services, we have three products, including securities advisory services, asset management businesses and overseas securities brokerage services. So, as you can see, that among five of our product lines, four of them are transaction based business. So that means we will be impacted by the market dynamics. But then, we don't think that the high volatility or the dynamics of the market is a negative price or the risk to our company.

Instead, we see more opportunities than the risk, because, if you look at our spot commodities, investors, especially our investor can treat both China and overseas commodities products. So the investors can see some market opportunities to long and short. So under the various market conditions, investors in long as in short the spot commodities and also the overseas securities. Well, various in the four [Phonetic] market, investors can definitely long and they will benefit to our securities advisory services. So nevertheless, of the market dynamic, we will see the opportunities. We will guide our clients to seize the opportunities. And why we can do that, because as we introduced, we have established 3,000 employee team in the company and we have a flexible business model that we can accommodate the market conditions to flexibly deploy our resources among the five product lines to take advantage of the market dynamics, to seize the opportunity and to guide our investors based on the market conditions to gain profit on their assets and investments. So we can, definitely elaborate the market conditions to make the greatest of profit for both our investors and the company.

And I think the next question is for Mr. Qian, about our expenses outlook.

Raphael Qian -- Chief Financial Officer

Okay. Now, I will help to answer your second question. As you have seen, net commissions and fees from our core business have increased over 40% on a year-over-year basis, as well as our total cost increase just only 4%. Obviously, the personnel cost occupies a major part of our total cost. However, in this quarter, the personnel costs increased by only 5% on year-over-year basis. The main reason is that the number of our staff has become stable since the end of Q1. And we have set a relatively flexible or dynamic strategy to transfer our focus of internal resources among these five product lines to cope in with the highly uncertainty in the local and the global market.

And we have taken a number of measures to control the personnel cost which will show a slow increase in the next few months. We believe we could achieve a considerable growth in our core revenue without a great increase in the number of staff. This will help lower the cost of revenue ratio and eventually contribute to the net profit margins.

Yvonne Young -- Investor Relations Director

Sorry -- James. James are your online.

James Chang -- Jersey International -- Analyst

Yes.

Yvonne Young -- Investor Relations Director

[Speech Overlap] Do you think we answered your concerns -- answered your question?

James Chang -- Jersey International -- Analyst

Yes, very much. Thank you very much. That's very helpful. Thanks.

Yvonne Young -- Investor Relations Director

Yes, thank you.

Operator

Thank you. And the next question comes from Gerard Seng [Phonetic] with China Securities Index.

Gerard Seng -- China Securities Index -- Analyst

Hi. [Foreign Speech]

Yvonne Young -- Investor Relations Director

For the benefit for our audience I will translate into English first. Just another question is from China Securities Indexes from Mr. John [Phonetic]. And his question is that congratulations for the company for a brief quarter for both Q1 and Q2 and also the company give us strong guidance for Q3 and he would like to know the revenue mix for Q3 for our core business and how the companies -- how the outlook for this five products going forward. Our CFO, Raphael Qian, will answer this question.

Raphael Qian -- Chief Financial Officer

[Foreign Speech]

Yvonne Young -- Investor Relations Director

Let me let me translate into English first.

Raphael Qian -- Chief Financial Officer

Thank you for your questions. We are -- as you can see that in Q1, we recognized a total of RMB309 million revenues from net commission of fees from both spot commodities and the securities. The commodities contributed RMB174.8 million and then the security services contributed to RMB134.2 million revenues. As per Q3, we guided RMB380 million to RMB400 million. We do not give a specific revenue mix for our five product lines. But I can shed some color on the fleet amounted to product lines. The commodity sale value takes up -- we will take up 60% to 65% whereas the securities will be 35% to 40%. Thank you.

Gerard Seng -- China Securities Index -- Analyst

[Foreign Speech]

Yvonne Young -- Investor Relations Director

[Foreign Speech]

Gerard Seng -- China Securities Index -- Analyst

[Foreign Speech]

Operator

Thank you. And this question comes from Jay Wong [Phonetic] with Industrial Securities.

Jay Wong -- Industrial Securities -- Analyst

[Foreign Speech]

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

[Foreign Speech]

Jay Wong -- Industrial Securities -- Analyst

[Foreign Speech]

Yvonne Young -- Investor Relations Director

I would translate into English first. So this question coming from Jay Wong from Industrial Securities. His question is about the earnings outlook, because Mr. Chen mentioned in his remarks that we nearly achieved a breakeven for our core business. And he'd like to know whether the company will maintain this profitable growth in the future? Or, we see any -- how is the business trending forward?

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

[Foreign Speech]

Yvonne Young -- Investor Relations Director

Okay, let me translate.

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

Thank you for your questions. As you can see from our Q3 guidance, that our core businesses delivered a strong growth quarter-over-quarter. And we see that -- we believe that we will maintain this trend going forward. In the second quarter if excluding the treating gains and loss, we basically, as I mentioned in my earlier remarks, that achieved a breakeven for our core business. In the third quarter we think that we can make some profit from our core business slightly. And but this is not our target. We see the industry dynamics for the Asia market and the gold -- spot gold trending more favorable as we can see, we believe that the potential of our business can be truly presented, this is the first one.

And secondly, even in the worst case scenario, that the market dynamics maintain, what we can see now, we think that after more than one year of investigation and also the business model discovery, of our five product lines. And also our emphasis and our continuous investment in research and improving the quality of the service to our clients, we have delivered a greater and faster growth potential of our business, relative to our peer companies. So we think that this year or 2019 is still a year for preparation for the favorable market conditions we anticipate, and the next year, we think that we can gradually deliver the revenue scale, we expect.

And then the third point is that we think that the five product lines we target have a promising future and these are the niche business areas we covered are different from some other areas which have high competition. And the focus for our company next is to serve better of our clients. As I have introduced that in my remarks, and just now, and to satisfy our clients, to make our clients, to keep our high retention rate for our clients. And if we can achieve this, I don't think the top line growth and bottom line earnings is a question to us, because we have accumulated years of experience and competitive advantage which are clear to see to our peers and also our team. Thank you.

Jay Wong -- Industrial Securities -- Analyst

[Foreign Speech]

Yvonne Young -- Investor Relations Director

Thank you.

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

[Foreign Speech]

Operator

Thank you. And this is all the time we have for questions right now. I would turn the floor to Yvonne Young for any closing comments.

Yvonne Young -- Investor Relations Director

Thank you. Thank you, everyone, for participating in the conference call for Yintech's Q2 earnings. If you have any further questions, please feel free to come check me at the contact details at the end of our earnings release. We'd like to speak to you in the next call. Thank you. Operator, you may now disconnect.

Operator

[Operator Closing Remarks]

Yvonne Young -- Investor Relations Director

Thank you. Bye.

Duration: 62 minutes

Call participants:

Yvonne Young -- Investor Relations Director

Wenbin Chen -- Chief Executive Officer and Chief Financial Officer

Raphael Qian -- Chief Financial Officer

Lew Lily -- JP Morgan -- Analyst

James Chang -- Jersey International -- Analyst

Gerard Seng -- China Securities Index -- Analyst

Jay Wong -- Industrial Securities -- Analyst

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