LexinFintech Holdings Ltd.

And gentlemen, thank you for standing by and welcome to the Lexin FinTech 4th Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Mr. Tony Hung, Senior Director of Capital Markets. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Lushin's fourth quarter and full year 2020 earnings conference call. The company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Hsiao, our founder, chairman, and chief executive officer, Mr. Craig Zinn, our chief financial officer, Mr. Yang Chao, our vice president, Mr. Stanley Zhao, our senior financial director, and other members of our team. For today's agenda, Mr. Hsiao will provide an overview of our recent performance and highlights, Mr. Zeng will discuss our financial results, and Mr. Chao will discuss our credit performance. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call, as we will make forward-looking statements. Also, please note that this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are unlimiting. I will now turn the call over to our CEO, Mr. Xiao, whom I will translate for. 好的,四季度乐信2Bank的科技住在模式,我们取得了重大的进展。 我们在新增的交易中,无风险存科技的整个的一个部分比例首次达到50%,

In the fourth quarter, Pershing's two-bank technology loan facilitation model achieved significant growth.

As a percentage of new originations, our risk-free pure technology service model reached 50% of total new originations for the very first time. We are creating a comprehensive technology service system that will cover all aspects of customer acquisition and operations, enabling financial institutions to immediately and seamlessly integrate with our system. On this basis, fourth quarter platform revenues reached $720 million. an increase of 232%. For the full year, platform revenues reached $2 billion, an increase of 150%, and increased as a portion of total revenues to 17.5%, versus 7.7% from a year ago.

In the fourth quarter, nursing generated loan originations of $53.2 billion. Our non-GAAP net income reached over $600 million.

And total loan originations last year reached 176.5 billion, representing an year-on-year increase of 40%. Revenues were 11.6 billion. We've also recorded our sixth consecutive quarter, where new registered user growth reached 10 million. In addition, quarterly active users reached 8.2 million, a new record high for us. And as of the end of 2020, Lushing's total registered users reached 118 million, representing a year-on-year increase of 61%.

So we are very happy to tell you that in the face of a very complex external environment, we are proud of our new consumption strategy, ensuring that we have achieved good results in the four seasons. Our financial technology business has achieved a high-quality growth. New businesses such as business dating and purchasing have also quickly gained market recognition. This will open up the second growth curve for us and will further establish our leading position in the industry.

So as a result, I'm pleased to announce to everyone that in the face of a complex macro environment, we successfully executed our new consumption strategy, achieving once again good results. Our two bank financial technology services have achieved high-quality growth. Our two business products, Yuehui, Maya, and other new products are rapidly gaining recognition and opening a new avenue for growth, which will continue to firmly establish our position as a leader in the industry.

Our asset quality continues to improve. Our 90-day delinquency declined from 2.6% in the third quarter to 1.95% in the fourth quarter.

New loans made in the fourth quarter are currently exhibiting even better levels of credit quality than loans made in 2018. Even while our financial technology service business continues its rapid growth and development, we're also establishing a new consumption ecosystem and expanding our potential customer base from 120 million to the 500 million new consumption consumers. Our business scope will expand from installment loans to cover the larger new consumption market. We will establish ourselves as a new consumption digital technology service provider, and we have confidence that our many years of accumulated technology capabilities and operational experience in the financial technology sector will ultimately enable us to find opportunities and succeed in the larger new consumption market.

yuanhui has already established working relationships with hundreds of merchants, including movie theaters, restaurants, shopping centers, and hotels.

totaling over 10 different industries and sectors, and has been recognized by 17 Senzen Industry Associations in their consumption documents and proposals. Maya is now online and operating within our Feng Shui e-commerce platform, and we estimate that in the first month, we will generate approximately $50 million in GMV, with strong potential growth in the second quarter.

After the pandemic, the domestic economy was rapidly recovering, and we also saw more growth opportunities. Following the pandemic, the economy has continued to recover and grow rapidly, and we now see even more growth opportunities. Based on the strong growth and improving asset quality that we are seeing in the first quarter, we are raising our full year 2021 loan origination guidance

to 240 to 250 billion, representing an year-on-year increase of approximately 40% versus our 2020 numbers.

Thank you, Jay, and hello, everyone. I'm pleased to announce that we have once again delivered strong results.

In the interest of time, I will now go over line item by line item of our financials. For a more detailed discussion of our fourth quarter and four-year 2020 results, please refer to our earnings press release. Total operating revenue reached RMB 11.6 billion for 2020, and the credit-oriented service income reached RMB 7.5 billion. Platform-based service income reached over RMB 2 billion, representing an increase of 150% from 2019. Adjusted net income was RMB 903 million for 2020. Fully diluted adjusted net income for the quarter per ADS was RMB 2.93. Operating leverage. Operating expense as a percentage of average loan balance was 3.1% for the quarter, and a non-advertising marketing Advertising, G&A, and R&D was 0.7%, 1.2%, 0.7%, and 0.5% of average loan balance, respectively. As Jay mentioned, we currently have 118 million registered users, and our customers with credit line reached 27.7 million, up by 43.2% versus December 31, 2019. We acquired nearly 6.1 million new active customers in 2019. in 2020. For the last quarter, our average tenure was 12 months. Our nominal APR was 16.1%. Next, we will discuss our credit situation.

Okay, I'm also very happy to take this opportunity to share with you a change in our management. Our original CRO, Ryan, due to some personal hobbies, he also hopes to try more business opportunities. So he transferred from our company's entire CRO position to our business position. He will be in Lexin. to be responsible for our entire industry and overseas related business. Our new risk manager is Mr. Qiao Yang. He is also very happy to be at our meeting today. He will also share with you some of our risk situations. Mr. Qiao Yang has a lot of experience in financial technology companies in China and abroad for more than 10 years. I'm also pleased to announce a management change. Ryan Liu, our CRO, has now been promoted to our Senior Vice President in charge of new business initiatives

where he will handle various new initiatives as well as overseas business. We strongly thank Ryan for his service to our company, and we feel that based on his personal preference and desires, he will be able to meet the challenges in his new business responsibilities. I'd also like to introduce Mr. Chao Yang, who has decades of overseas experience as well as domestic experience in the credit industry and has deep experience and know-how when it comes to credit scoring, risk control, and asset management. Next, I would like Mr. Young to discuss our current credit situation.

Thank you, Jay, for the introduction. We continue our stable credit performance in this quarter. In spite of challenging conditions in the past year in the market, our credit quality continues to be high and within expected levels. and we fully expect our credit statistics to perform well within expected levels and to improve over time. As Jay mentioned, our 90-day plus delinquency ratio declined from the third quarter to 1.95% in the fourth quarter, and we continue to see stable or improving credit performance as our lifetime charge of ratio has stabilized. In addition, our first payment default rates for new loan originations have been below 1% for the past five months now. and our one-month delinquencies for all our key past vintages have peaked. As a result, we fully expect our credit performance to remain strong, stable, and improve in 2021. With that, I conclude our prepared remarks. Operator, please proceed with questions and answer session.

Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Please ask your question in Chinese. If you can, then kindly repeat the question in English. Your first question today comes in the line of Jackie Zhu from China Renaissance. Please go ahead.

Thank you, Director, for giving me the opportunity to ask a question. I have three questions I would like to ask. The first one is about our guidance. I see that we expect to see a growth of 40% in long volume this year. I would like to ask what are the driving forces behind this. After the past two months, we have once again improved the guidance of long growth. I would also like to ask what the trend of the first quarter is like. I would also like to ask about the increase in the balance of the loan amount corresponding to 40% this year. The second question is about the supervision. Recently, we have seen a supervision on strengthening the school loan. It also mentions the third party's cooperation method, which is not directly to the bank for student transfer. I would also like to ask about the current impact on us. I don't know what the threshold is like. The third question is about the current asset quality. As you can see, the asset quality is clearly improving. I would like to ask you about the main goals and changes in the asset quality and the trend this year. This year, So I will translate my questions. Thanks for taking my questions. So I have three questions. Number one is about our loan growth guidance. I saw that we are guiding 40% loan growth for this year. Just want to understand the key drivers behind. And we actually lift our loan guidance within two months. So just want to check. the first quarter trend regarding the loan growth and also want to check what is the loan balance growth according to our 40% loan volume guidance. And second question is about the regulation. We observed that the recent document regarding the strengthening regulation regarding the college loan. So just want to check what is the impact to us The document actually mentioned the third party cannot direct the college student traffic to the licensed financial institutions. And third question is regarding our asset quality because we mentioned that we try to maintain a high quality growth this year. So just try to understand what is our risk management strategy this year and also what is our vintage loss strategy. target for 2021. Thank you.

Okay, let me answer your first and second questions. Regarding our guidance and expectations, the most important thing is that there are several reasons. I think the first one is that we still see that the entire domestic environment, the entire regulatory environment is getting more and more stable. Although we have recently launched some policies, But the overall policy is more limited to a model that has been used by more giants in the previous market, that is, the model of the joint bond. We see that in fact, in the whole bond, in fact, on the contrary, in fact, in some of the recent regulators, it will still be more recognized by the regulators. I think we see that Lexin, our core model, is all bond, we have no joint bond. So we expect that the whole market will also make some changes under this new supervision. When some heads do more joint representative, their whole growth space will be limited. So I think this is a very important opportunity. It is expected to bring us some new growth opportunities. The second one we can see is actually based on some numbers from the first quarter to the present. We can see that in the first quarter, and last year's fourth quarter, in terms of the overall performance of these two quarters, our growth rate has been the best in recent years. So we see that our entire asset value has gradually reached the low end of history, and we are still seeing that it has a good potential. So based on a large market background, and our own growth trend in the first quarter, So Jay will answer, Jackie, your first couple of questions.

With regards to the first question on why we raised guidance, well, it's primarily due to two reasons. One, you can say, is a macro reason or a high-level reason. The second one, you can say, is a micro reason or a reason specifically attributable to us and our performance. First on the first reason, we're seeing right now a very, very good and positive macro environment, and in particular, when it comes to the regulations and the regulatory environment. It's increasingly stable and also increasingly moving towards a favorable direction. While there may be some announcements that seem negative to us, we do see that, as a whole, what is happening is that it is primarily impacting the much larger players, and it's primarily aimed at limiting the much larger co-lending model. For the model that we use, the loan facilitation model, what we're seeing and what we are hearing is actually quite the opposite, that it is actually being recognized and increasingly recognized by the regulators as a favorable part of the entire environment. That is the only model that we use. So hence, we see an environment where the regulatory environment is increasingly stable or even favorable. The larger players are in turn also being constrained because of the co-lending model. And hence, this is generating tremendous potential opportunities for us. So hence, we feel strongly that there's going to be new additional growth this year. So that's the macro reason. On the micro reasons, when we look at our first quarter numbers and how we have performed thus far, In particular, compared to the fourth quarter of last year, which, by the way, was a record quarter, we can actually see very, very strong growth. And not only do we see strong growth, we see, in fact, years to date, some of the best growth and not the best growth ever that we have experienced. And, in fact, this extends also to our asset quality, which we can see is among the historical best and may, in fact, even get better. So hence, for these two reasons, one, again, the larger environment or the macro environment, in particular the regulatory, two, our own recent performance, we feel strongly about our ability to raise our guidance. 然后另外就是我们年对年40%的增长,我们预计在余额的整个增长上应该会在25%左右。 So with regards to the specific loan balance, we feel that it'll probably be something like 25% year-on-year growth in loan balance.

China China China So on the second question that you had, Jackie, with regards to the student loans and the impact from the recent regulatory announcement, as you know from actually many years of covering us, this is nothing new in particular.

This is something that has been out there and written in very, very similar ways literally years ago. As a result, you can say that we have been prepared since years ago. Of course, the banks are the institutions that actually approve the credit. It needs to go through their system. Hence, we are already compliant in many ways on this. In a lot of ways, with regards to the requests or the actual details of the proposal, and how it's implemented, we are very much within that system and range already. Now, of course, we may need to make some possible adjustments, but primarily the adjustments will be made on our funding partner side, and we will work with them to make these adjustments. However, I think we do want to emphasize that we expect very limited change or impact to our underlying operations as we continue to work with our partners on instituting the appropriate changes.

To answer your third question, as I mentioned in the conference call, our 30 days plus and 90 days plus delinquency ratios continue to improve. Our vintage delinquencies have also been decreasing over the past couple of months. Our day one delinquency and collection performance have also continued to improve. We believe our current credit performance is at a very healthy condition. We believe this credit performance will support our strategic plan to grow our portfolio. In the future, we think we will maintain a cautious approach. Our credit performance will fluctuate within a very controllable and narrow range. As our new business continues to grow, we'll attract lower risk customers into our portfolio. portfolio risk will continue to improve. So our target, if I have to give a number, I think I would say our vintage loss target will be around or below 4% for the year 2021. And your next question today comes to the line.

of Eddie Leung from Bank of America. Please ask a question.

Thank you for your sharing. I have two questions that I would like to ask. The first one is about the new business model that we have purchased. Jay mentioned some of the results of the first month. So I would like to ask how much of the outlook of the chain is related to the first buy and the second buy? Then the second question is, because we have a trend of division, I have two fairly quick questions. The first one is about buy now, pay later model. What could be the contribution from buy now, pay later for the full year loan growth guidance? And then secondly, about the public sharing model, how might that affect the take rate and hence the revenue growth for 2021? Thank you.

Okay, thank you. Let me answer the question about first-come, first-served. First-come, first-served is actually a completely new model for Le Xin. It is a product that is paid by the consumer and then paid by the merchant. So we are also very happy to see that after we launched this model, we were welcomed by the users and we can achieve a certain scale in a month. We also expect to reach a scale of 50 million. This business is still in a relatively early stage, so we still need time to look at the specific growth and change of this business. This will also be related to the investment of some resources in our entire company. Therefore, we do not have such a comprehensive expectation on this business in the future. In addition, this is a new model, so it is a non-borrowing model of the entire transaction. So, Eddie, with regards to your first question on the buy it now, pay later product or myop product, well, as you know, it's a totally new model.

It's a different kind of model where there is no charge to the customer, but there is a cost to the business, which no doubt they'll make back. And we're obviously very, very pleased to see all the positive reaction from our customers to this product, which is why we expect to do 50 million in GMB in the very first month. Now, that said, this is a new product, and this is still very, very early. So it's hard to say what it will do. And it also depends on how things develop. And depending on how things develop, we may deploy certain resources and commit additional resources to this product, which, of course, then in turn impacts its potential growth. So there's a few things going on here, and hence it would probably not be appropriate for us right now to give a full year number on this. Now, I think it's also very, very important to point out to everyone that this product, similar to what you would see if you look at Afterpay in Australia slash the U.S., this is not a loan product. And that is by definition. And by definition, I actually mean by the regulatory authority's definition. This is not a loan product. So in that sense, there's no loan origination. There's no loan balance. So it is basically very different. And hence, it would not be regarded as, if you will, a financial product in the sense that you're used to looking at our underlying business.

Regarding the impact of division, we had more than 50% division in the fourth quarter last year. It also proves that the company has the ability to take all the risk to the institution. This year's division, as Eddie just said, may have a certain impact on the take rate. Because division is on both sides. On the one hand, the institution has taken on more they will also have to take full responsibility for this risk. Therefore, they may have a greater demand in the entire division of interest. Secondly, because Frenzy is relatively a relatively new product, so the price is similar to when we first started doing direct loan. It will also be relatively higher. So last year we saw that there was almost one point of influence, one point or so of influence. This year, we expect that this gap will be slightly reduced. In addition, we may also control the quantity to see if the market will give the market a time to digest the recognition of this model. So we think that this year's proportion will not be as high as the fourth quarter. If you make a model, from the point of view of take rate, So on the profit sharing model, as you know, in the fourth quarter, we were able to do over 50% of our loan originations in the profit sharing.

So this was actually very, very rapid growth. And it demonstrated very clearly our ability to transfer the credit risk to our funding partners and their confidence in our credit risk abilities. So, Eddie, you're absolutely right that by doing this and by doing more of this, this is going to definitely impact our take rate since this is a natural result of the fact that the financial institutional partners will be taking on the credit risk. So, hence, they should be getting more rewards. Now, that said, especially given the fact that this is a new product, if you will, and that you need to get more and more partners on board, the pricing can vary, if you will, because each time it would need to be negotiated. And hence, you would have different levels. So one can expect that a more mature funding partner may get one pricing, and a less mature funding partner may get or demand a different type of pricing. So hence, there's all these pieces going on, but it will definitely have an impact. Now, I think within that context, and having said that, last year, it was probably something like a 1% difference versus our traditional loan facilitation model. This year, we're hoping to target to lower that, so it should maybe be lower this year. And also, we may control the scope that we do the profit sharing to some degree in the sense that it may not grow as rapidly as you saw in particular in the last quarter of last year. It'll still grow, but maybe not at that rate. Now, when we come to the actual modeling and modeling purposes, I think what we may be looking at is maybe something like a 50 to 100 basis points adjustment versus the OTIC rate. So that's what we would recommend everyone do in terms of their adjustments.

Thank you. Very clear. Thank you very much.

And our next question today comes online of Richard Xu from Morgan Stanley. Please ask your question.

Thank you very much for giving me a chance to ask a question. I have two questions to ask. First, I would like to ask, we have seen a lot of changes in supervision recently. In terms of customer channels, of course, we also have some new models. I would like to know if there are any obvious changes in our current new customer channels. For example, some of the main proportions, such as traffic platforms, such as TikTok, and other Internet platforms. 那再往前看的话,这块拓展有哪些可能还能去拓展的一些机会或者在谈的一些机构? 非常感谢。 I guess I have two questions. One is on the client acquisition channels, any changes from last year? Because there's obviously a lot of regulatory changes that impact some of these major platforms in the industry, whether that has changed, you know, impacted the dynamic of the client acquisition channels, any strategic changes that we're trying to make. And secondly, on the profit sharing model, what are the key institutions that we're working with and any potential, you know, I guess partners in the future? Thanks.

Yes, I will answer the first question now. I think from the perspective of goods, you can see the level of goods last year. The level of goods last year is equivalent to the scale of goods in 2019. We all know that 2019 is a year of large-scale advertising. So what is the biggest change between 2019 and 2019? So we know that in fact, we look at the data comparison of two years, the number of users is almost the same, but the cost is different. So the cost of our entire customer is lower than that of 2019. In fact, this refers to a major change in the way we bought goods last year, which is our cooperation with non-standard traffic platforms. For example, we work with a lot of traffic platforms on the market, such as Queue Music, Queue Video, iQiyi, and so on. We work with them. They help us recommend users and open up a whole fun card for us. We will give the user a way to send a member. This kind of non-standard flow is not like commercialized investment. Its flow can go up in the entire market. This kind of flow will actually make the whole potential of it cheaper. And it is a very win-win cooperation for us and the cooperation platform. So we can see that our growth rate here last year was very fast. So, Richard, that's definitely right. We've had some changes when it comes to the customer acquisition. On the first question, if you look closely at what we did in 2019 and also contrast that to what we did in 2020,

you'll see some interesting things. Now, as I think everyone knows, in 2019, that was a year where we spent a lot of money and where we really began to advertise online. And we acquired a lot of customers that way. And we set all-time records when it comes to our customer acquisition in that year. And in 2020, we actually came very close to our numbers in 2019. but we did it with greatly reduced sales and marketing costs. And we did it also by reducing greatly our use of online advertising, such as with the channels that you mentioned earlier. So we used a lot of innovative and, if you will, nonconventional methods to acquire nonstandard traffic, and we did basically the same amounts of arguably higher quality and at much lower costs. So overall, it was actually a very, very successful year last year as we switched to these new non-conventional, non-standard channels. Now, as mentioned, a lot of this is about strengthening cooperation and working with sources such as QQ Music, QQ Video, iQiyi. And what we would do sometimes is, for example, if they refer a customer to us for our little clock card, we then give a membership to these platforms. This is a situation where we can actually go through a bidding or auction process as opposed to more standard online advertising and receive much more competitive, cheaper, favorable pricing. It is also a situation where it's actually a win-win for all sides involved. Hence, we have deployed rapidly on this particular front last year. And you can see from the results that on a monthly basis, we can get several 10,000, if you will, new customers from these non-conventional channels.

Because the funders who worked with us for a long time can clearly see the performance and risk of our entire asset under a guarantee mode. So we have confidence in these assets. If we have a better model, we can share more revenue with them. So they will be willing to try to do this direction. Especially after we have realized the scale, we have successfully achieved better revenue in this model. So, in theory, the funders we work with will be interested in introducing this model. So, the institutions we work with now mainly have some commercial banks, including consumer finance companies, right? Then they will definitely be a more positive foundation than those big stock market banks. From now on, if we increase the proportion of the division model, I think this condition is already available. But this year, we are also trying to achieve a better balance in terms of risk and revenue. So our division model is also being upgraded. OK.

Richard, so, and I double checked there a little bit on the numbers. Right now there's actually over 20 financial institution partners that are working with us on the profit sharing. But many, many more are very much interested. And one can certainly expect this because many, many more institutions are many funding partners are very comfortable with our risk levels and have accumulated literally years of data on what we have done and the risks that we have generated. So there is a very, very clear profile of the risk of our underlying assets and what risks are being generated. So hence, more and more partners are in the pipeline and coming on board, being willing to accept the risk. And we certainly expect this to increase in scale. Now, ultimately, of course, this will mean better returns for the funding partners. And hence, not surprisingly, For those partners that are not working with us directly or in the process of working with us directly yet, it's safe to say that everyone is interested and is interested in taking a look. Now, in terms of the types of funding partners that are more active, if you will, right now, it would be city commercial banks, it would be consumer finance companies, which perhaps is not surprisingly as they are smaller and, if you will, more dynamic and can move quicker. And hence, we do expect this... to gradually shift as well. But these are the types of institutions that are more interested right now. Overall, we expect the profit sharing as a whole to increase. We're also going to seek ways to balance this and to optimize this and also experiment with new types of funding models to reduce our overall funding costs. It may be profit sharing, it may be non-profit sharing, it may be some type of mix in between. But overall, yes, profit sharing is definitely going to go up.

Sure, thank you.

Your next question comes to the line of Alex Yee from UBS. Please go ahead.

Thank you, Mr. Guan, for giving me the opportunity to ask a question. I mainly have two questions. The first one is about this. Our pricing, I see that our nominal APR has a rebound compared to Q3. I wonder if the subsequent outlook will go up, and what kind of level is the capital cost at present, and whether the subsequent outlook will increase or decrease. The second question is about the tech rig in the split mode. It seems that this quarter has some declines compared to the previous quarter. This is different from our pricing rebound. I have two questions. First question is on the outlook for pricing and funding cost. So I have seen the nominal APR have some recovery from the level in Q3. So I'm just wondering what's the outlook for the pricing going forward and what's the current level of funding cost? Do we have room for further decline in the funding cost? And my second question is on the tech rate for the risk-sharing model. It seems like the tech rate for the risk-sharing model has declined somewhat from Q3. So I'm wondering what's the reason, and will the tech rate recover back to the previous level in Q2 and Q3 last year? Thank you.

The first one is that the pricing should be related to the population. I think that in the long term, the population of Le Xin is a high-growth population. As our users grow, they will gradually go down for the long term. I think this should be a trend. Because if we can serve better people, they should have better pricing and better attraction. 那另外一个呢,我们从短期来看,我们认为短期如果在政策上还有整个的一个金融机构的合作上面没有进一步的一些要求,我认为在短期内我们的整个的一个定价仍然会保持相对的一个稳定嘛。 So on pricing, I think Jay wants to emphasize there's two perspectives overall. One, if you will, that's a little bit longer term, and the second one, that's a little bit shorter term.

So first, with regards to the slightly longer term outlook, mentally, as you know, we target a very high quality, high growth, a good cohort. And given that this is a high quality, good, and high growth cohort of maturing and improving credit quality over time, rates naturally will decline over time. So hence, over the long term, we fully expect the rates that we charge to our customer over the long term to decrease. Now, short term, if we look at the current situation, if there's no new, if you will, regulatory requirements, if there's no new guidance in particular on this, then I think, at least for the current moment, you can expect the interest rates that we charge to be relatively stable.

In terms of capital costs, these two are probably the same problem. Capital costs will be slightly higher in the fourth quarter than in the third quarter. It is about 7.4 to 7.7, which is the capital cost in the table. Mainly because the fourth quarter is a relatively special quarter, especially in the last month. The entire large financial institutions, because of their different strategies and red-light systems, will have some So, in the fourth quarter, we may need to look for more diversified funds, especially at the end of the year, when some funds may be more tense. So, sometimes it will be a little bit higher. We think the overall capital cost will go down. This year, we will also see the trend of capital cost going down. The first point of Tecrate is that you may also notice that the proportion of our division is growing very fast in the fourth quarter. Of course, this is also a strategy of the company, which is to look at our division. If we really want to make it grow rapidly, do we have the ability to do it? In fact, we can do it. But in this process, maybe because there are some new, including some new funds to come in, we also want them to really feel the operation of this product, including all kinds of things that belong to it. So the capital cost may not be the first priority. So in regards, Alex, to your second question on profit sharing, take rate, I think it's important to note that there's all these things against the profit sharing ratio, the take rate, the negotiations.

as well as, of course, the underlying cost of capital. Now, for the fourth quarter, our underlying cost of capital probably increased slightly from 7.4% to about 7.7%. This is in no small part due to our continued strong growth. And as we grow, we, of course, have to source additional institutional partners. And unfortunately, in the fourth quarter, for a variety of reasons, the bigger institutional funding partners have had certain limits or requirements, or otherwise, if you will. So, hence, the funding was a little bit tighter in the fourth quarter, and we had to get other sources, which then impacted our cost of capital. So, hence, it was for growth reasons, if you will, that some of these things occurred. Now, longer term, though, we fully expect the cost of funding to decrease. And, in fact, the longer term extends, if you will, to this year. This year, we certainly expect the cost of funding to continue to decrease. And of course, we have to balance all this with the profit sharing model as well, which in turn reduces profitability. Also, of course, as we introduce new partners in, whether as a funding partner or alternatively introducing them to the profit sharing model, this may require additional negotiations when it comes to the economics, as they are a new partner in one way or another. which of course may mean that we need to give up some of the economics in order to gain them and gain their trust initially as a partner. So there's all these types of ongoing balances that we also talked about earlier and also involving the different models. So hence there's different complicated things going on in the background which I think after you heard all this you understand fully how it can be nuanced and again complex.

Your next question today comes from the line of Ethan Wang from CLSA. Please go ahead.

Thank you. I have two questions. First, I'd like to ask about the Buy Now, Pay Later model. Although this is a relatively new model, we may need to pay the customer first and then do the Pay Now, Pay Later model with the customer. Does this mean that we need to borrow money from the bank and pay the electricity bill? So I have two questions. The first is a follow-up question on the BNPL model. Because on this model, most of the time on the platform needs to pay the merchants first before granting the pay latest given to the consumers. And they need to borrow from banks in order to do that. So does that mean versions are going to borrow more from banks in the future? My second question is regarding long item of change in fair value of financial guaranteed derivatives. within other income for the fourth quarter. We noticed that this line has incurred a 700 million RMB loss in the quarter. So just wondering what is the reason behind. Thank you.

Okay. Regarding the financial model behind this, I just emphasized that we are still in the early stages of this business. We plan to design a variety of investment models for this business. Currently, we provide two solutions and choices to our customers. The first one is that due to the short term, some of the customers can fully take over the debt period. So behind this, if the customer chooses to pay in the short term, it will be in line with the consumer. So if the consumer pays us back, we will pay the customer back. So this does not require the entire structure of the fund. In the current situation, there is also this model. There are business owners who are willing to accept this model. Another model is that we adopt a business owner who chooses to receive the money as soon as possible. Then the business owner will have a receivable account. This receivable account will correspond to the corresponding fund. We will also include the possibility of trust, as well as some financial institutions. They go to buy the entire revenue of the entire business. Through the entire revenue of the entire revenue of the entire revenue of the entire revenue of the entire revenue of the entire revenue of the entire revenue of the entire revenue of the entire revenue of the entire revenue

So I think, Eden, on the whole buy now, pay later model, as we emphasized earlier, this is very much a new model and a new product. So there's definitely a lot of moving parts and different things going on. And also, we're working inherently with different models, if you will. And right now, what we're seeing is that we can give the merchants and the vendors two choices, or rather... They themselves would take on two choices. Some merchants, essentially, if we direct and have the right customer sent to them, they're totally willing by themselves to take on, if you will, the capital requirements. They can basically lend, for the lack of a better term, or they can accept the installment payment over time by the customer. And I want to emphasize a little bit, again, the lack of a better term earlier. Now, other merchants, they may want the cash immediately now. But, of course, through this buy now, pay later transaction, we generate an account receivable. So, hence, we can work with various trusts, financial institutions, otherwise, to have the receivables financing or to alternatively set up other structures. So as I mentioned earlier, it's a new model. It's very dynamic. There's different things going on. I do want to emphasize that, again, and this is the part about, for the lack of a better term, this is not a financial transaction. This is, if you will, a non-financed transaction, just like Afterpay, et cetera. So there will be no credit record, if you will, for the customer. It's not going to go to a database or anything like that. So, hence, it's something fundamentally very different.

第二个问题,我想可能您说的那个7亿应该是全年的数字,不是四季度的。 这个我们其实趁着Infair Value or Financial Guarantee这些Duratives这些呢,是今年整个的我们会有一个,就是因为我们今年新的用了这个,新的这个风险模型之后呢,可能在各个类别之间它会有些调整,我们也是, Yeah, so for the 700 million number, Eden, you're obviously referring, of course, to the full year number, the change in fair value for financial guarantee derivatives.

I think basically, as you know, we have a changing financing model, risk model, et cetera, a model that in the past in the larger modeling sessions we've held for everyone in the past have outlined how it will work. So hence, as our funding slash risk models continue to change, naturally the mix will change and the line items will change as well, just as you see with, if you will, the profit sharing lines, et cetera. In the future, if you want, given that we've done this in the past and it's probably more worthwhile to do it that way, I'm more than happy to schedule a more detailed modeling session with you offline to go into how this will work. Got it, got it. My apologies.

Thank you, Craig.

Your next question today. come to the line of Steven Chen from Haikong International. Please go ahead.

主要两个问题想请教一下。 第一个是关于也是这个风云模式的那个follow-up。 想carry by两点。 一个就是代表今年的那个风云那边的占比会 to maintain at 50% or lower than 50%? And then you just mentioned that the take rate may be positive or negative. In the end, do you think this year's take rate can maintain stability or go up or down? What is the trend? This is the first question. The second simple question, I would like to understand is that we have two other numbers in the Adopted Income. One is about the so-called fair value change of the loan, and then there is a so-called investment savings. These two pieces, although the number is not large, it is tens of millions. But in the past two seasons, in the third and fourth seasons, we have seen that the number is like a reduction. Especially when we look at the balance sheet, the number is actually not big. If we look at our loan, it's actually only a few hundred million. But in a few hundred million, we already have a so-called fair value change. It's already a reduction. 5,000,000, 4,000,000, 7,000,000 or so. What is the reason in between? What loan did we buy? Then this investment, in two consecutive seasons, we have to edit every season, make an editing budget of about 30 million. Then in terms of investment, what is the main investment? Do we need to make these editing budgets? Then in the following few seasons, will we still see these two pieces I have two questions. One is a follow-up on the profit-sharing model. I want to clarify two things. One, are we expecting that the share of profit-sharing business to stay at around 50% for 2021? And what is our outlook for the take rate of the profit-sharing business Would that be stable or declining or increasing in 21? Second question is related to two items. One is the change in fair value of loans and then the other one is investment-related impairment. We saw that for these two items, actually for the past two quarters, there are some impairment at all, negative change in fair value. But in the balance sheet, we think that these two items, indeed, is not a big amount. So if you're trying to calculate the impairment or negative change in fair value against the amount in the balance sheet, I think that the ratio should be quite large. So I would like to understand what has caused these negative change or impairment laws. Are we going to expect that to recur in 2021? Thank you.

We also see that there is a gradual increase in the number of organizations that want to cooperate with us in the division model. Therefore, we will maintain about 50% of the division ratio this year. In the long term, we hope to increase this ratio. The reason why we want to maintain this ratio this year is that we can see So I think for this year as a whole,

Well, we're going to definitely see many, many more funding partners come aboard and accept our profit-sharing model, and we're going to see increasing numbers of that. But in light of everything, also our increased scale and size, I think at least for the immediate term, right now we're expecting the profit-sharing to be fairly stable, so maybe at around 50% or so. But longer term, we certainly expect this ratio to increase over time. And the reason why we're now expecting this to be stable is that we feel that we really need to see better and have greater clarity on the underlying performance and the profitability of the model and to make the right choices when it comes to the balance of these things. But that said, we're pretty confident in the long-term direction and potential of this given that there's going to be more and more funding partners coming aboard. There's more and more funding available. There's fewer of us. There's more of them. And hence, we should see improvements over time and ultimately improvements in the underlying take rate.

Regarding the second question, regarding the change fair value, I have already answered it. The second one is what you mentioned, which is the reduction in investment. We have mentioned this in two consecutive seasons. In fact, this is all about one of our investments in the U.S., This company is doing two jobs. One is a loan for students' car loan, and the other is a loan for consumption. After the pandemic, students from all over the country can't go back to the U.S. So these car loans and all these operations have to go into a halt. It's not big enough. It's not big enough to handle such a long epidemic. So we are still evaluating their situation. So in the third quarter, we looked at their situation and felt that they were more difficult. We probably mentioned half of it. In the fourth quarter, we feel that they will probably not be able to continue to operate. So we also mentioned the other half. There is no future. We have already mentioned all of this. So it is probably such a situation. This is not a long-term or a regular thing. It is a one-time thing.

Yeah, so I think for the two parts, and definitely Stephen, correct us if we misunderstood you. For the first part, I believe we addressed that when it came to addressing the change in fair value of financial guarantee derivatives and talking about the different models. So it's for similar reasons. With regards to the second item you mentioned, with regards to the change, or rather the investment-related items, This is actually related to a U.S. company, a relatively immaterial investment we made in the past of a company in the U.S. that specializes in making auto loans to foreign students in the U.S. and also providing other forms of debt. Now, unfortunately, the pandemic has impacted this company, not surprisingly, quite dramatically. So as a result, we decided to write off something like half of our investment in the third quarter, and to continue to do that in the fourth quarter as well. So obviously, now that you know the details of this, this is definitely not a long-term thing, and this is basically a one-time item.

非常感谢,不好意思,可能刚才我有一点不清楚。 其实我想问的就是关于那个所谓的changing fair value of loans, Sorry, can you translate that for everyone? I appreciate it. Sorry, maybe I did not ask very clearly. What I want to ask is about there is an item called change in fair value of loans, which is around $47 million decline or negative change in fair value. But if we take a look at the balance sheet, the amount of these loans was not a big amount. So what has caused the decline or negative change in fair value? Is it related to interest rate or? or something else, or is it related to asset quality problem? What sort of loans are we buying and from where?

I think you understood that. Some fair value adjustments to some of the repayments. Thank you.

Very clear. Thank you.

And your next question today comes to the line of Dennis Zhang from MoChain Asset Management.

Please go ahead. Hello, Guan Licheng. Thank you. I want to ask a question quickly. Last year, Guan Licheng mentioned in different occasions I guess my question for the management is about the possible secondary listing. Later last year, the management in different occasions briefly mentioned possible secondary listing. back in Hong Kong or China mainland stock market. I wonder if there's anything that the management can share today or any strategic direction change. Thank you.

It's like this. When someone asked this question, our reply was that we will actively evaluate any option that is beneficial to the company and investors. We still have this attitude today. There has been no change in strategy.

Yeah, so I think when we've been asked this question in the past, we would say that we'll definitely consider all options and do what's in the best interest of our shareholders as a whole. So for obviously many, many reasons, we probably can't comment too much on too many additional details given, if you will, the entire nature of the process. So we have to stick to the official line on this

Thank you. No problem.