LexinFintech Holdings Ltd.

Good day and thank you for standing by. Welcome to the LeSing FinTech 3rd Quarter 2021 Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host today, Ms. Batusha Cheng, Head of Capital Markets. Thank you. Please go ahead.

Hello, everyone. Welcome to Le Xin's Q3 Earnings Update. I'm joined today by Jay Hsiao, Chairman and CEO, Sunny Sun, CFO, Jayden Chow, CRO, and Erwin Liu, CTO. During the call, we will discuss business outlook. Any forward-looking statements that we make are based on assumptions as of today. The actual results may differ materially and we undertake no obligation to update any forward-looking statements. Finally, unless otherwise stated, all numbers mentioned are in RMB. I will now turn the call over to Sunny to go through the financial performance. Sunny, over to you.

Thank you Patricia. Good morning everyone. It's my pleasure to speak to you. and give you an update on our third quarter results. This quarter marks the execution of structural change of our core businesses, and I'm delighted to say the progress has been encouraging. Loan origination rose 15.6% year on year to 55.9 billion RMB, of which 42.9% was priced within 24%. up from 37.6% in the second quarter. If we look at the last month of Q3, the improvement was even bigger. About half was priced within 24% in September. Average APR for the September intake was 26.8%, down 1.4 percentage point from June. In line with regulatory direction, as we adjust down loan pricing and move away from high APR borrowers. There will be measured slowdown in top line matrix. Total operating revenue reached 2.97 billion RMB in the third quarter, down by 5.9% from last year, and within management expectations. As our CEO, Jay, flagged in the earnings call of last quarter, we placed quality over scale. Growth margins posted 54% increase to 1.5 billion RMB. As a percentage of revenue, growth margin advanced by almost 20 percentage points year over year and held steady quarter on quarter at about 51%. Moving on to expenses. We have stepped up the overall spending to support new growth initiatives, such as the further build-out of Maiya team and Puhui team, as well as the technology upgrade that Ervin, our Chief Technology Officer, is spearheading. At the same time, we have also been streamlining operations and keep a diligent eye on general expenditure. GMA stays on the downtrend, going down by 2% year-over-year and 17% quarter-on-quarter. Net profit rose over 68% year-on-year to 551 million RMB in the sub-quarter. In addition, take rate stayed stable at 3.5% quarter-over-quarter. Top line optimization, cost management, and operational efficiency are critical to profitability and will remain as our priority. There have been constant noises about the sector this year. We understand investors' concern. The third quarter results are proof that we are actively responding to change, and we are determined to enhance the resilience of our businesses. Next, I would like to turn the call over to Jayden, our Chief Risk Officer, to discuss credit performance. Over to you.

Thank you, Sunny. We have been proactive in mitigating the pressure on asset quality coming from the change in policy and macro environment. The 90-day plus delinquency ratio finished the quarter at 1.85% unchanged from the end of Q2. In response to 24% policy, we have tightened the underwriting criteria and approval rate. The sequential drop in the number of active users and loan origination volume reflects our proactive management of high-risk borrowers. In the transition, we do expect some volatility in short-term risk. With the industry moving to reduce funding price at about 24%, the drop in liquidity will weigh on repayment ability of some borrowers. In anticipation of the interruption, we have strengthened the risk management framework for new businesses, the risk strategies and models, to make sure there's strict control over loan origination, especially when early stage performance is not yet stable. Risk management, the build on identifying, assessing, and monitoring risk, we will keep refining the process, and it will not compromise quality over volume. Finally, I would like to highlight another recent change. That is engagement with the technology team. Our activities generate a vast amount of data from internal interactions to external relations This wealth of knowledge is being turned into powerful analytics and predictive modeling. We have been working more closely with the technology team to better manage risk at both the business level and the operational level. I will pass it to Ervin, who will talk more about this topic.

Thank you, Jayden. I took up the CTO role in February this year. This was a newly created position and my mandate is to sharpen our in-house technology capabilities. By leveraging my international experience, including over a decade in the U.S., where I developed my career in software engineering at Microsoft and Facebook, optimization and innovation is our goal. And people are the most valuable asset. A vast majority of the R&D spending is talent-related investment. We're taking new talents to improve the existing infrastructure and address new opportunities. At the back end, we have built up a core engineering team dedicated to machine learning and data processing. In customer acquisition, asset bank matching, as well as risk management models, we have also been applying more AI and machine learning algorithms. In the middle tier, we have embarked on a re-architecturing of the platform into our kernel plugin structure to provide more flexibility and robustness in serving our technical development. As a result, the average engineering delivery cycle has been reduced by more than 30%. The new architecture has also improved its sensibility to enable new features for future business requirements. On the business front, we've updated our apps to make sure they meet the latest regulations and safety requirements without losing any of the existing user friendliness. To cope with the new privacy protection, we have strengthened the web security, encrypted storage of personal identifiable information data, as well as restrictions in data usage. In short, we are pleased to see that technology is playing a bigger role in helping us manage cost, compliance, and revenue. The upgrade has just begun. I look forward to sharing more with you later.

Thank you, Ewan. Last but not the least, a few words from me.

Hello everyone, I am very happy to communicate with you again. Just now, my colleagues have already introduced to you some basic situations in this quarter. With this opportunity, I would like to tell you about what we are doing and the next few things we are going to do. In order to adapt to the new management form, our financial technology business has been making structural adjustments to reduce risks and improve efficiency. In this quarter, we are trying to optimize our customer base structure and enhance the ability of detailed operation.

It's a pleasure to talk to you all again. My colleagues have walked through the highlights of the quarter. I would like to take this opportunity to share with you about what we have been doing and will be doing. For the core fintech business, we have been responding to recent regulatory developments by rebalancing the business structure, reducing risk, and improving efficiency. And our efforts are paying off.

We are ensuring that the scale of the business is basically stable. At the same time, our interest rate is lower than 24% in September, which has reached about half the ratio and is still in the process of continuous improvement. Our 90-day expected rate is stable at 1.85. The structure of the new asset is better. At the same time, our business efficiency is also further improved, but the cost of record management has fallen to 100 million yuan, which is 17% lower than the previous year. More importantly, As Sunny mentioned just now, we were able to increase the exposure of loan price within 24% while keeping the scale steady.

The mix went up to about half of the total in September, and the uptrend continues. Our 90-day delinquency ratio was unchanged at 1.85%. Alongside the realignment of business mix, we've also improved operational efficiency. G&A expenses fell by 17% quarter-on-quarter to RMB 100 million, setting a new low as a percentage of revenue and loan balance. More importantly, tick rate has not been compromised during the process. This demonstrates the effectiveness of our response. We're confident that once the transition is completed next year, the sustainability and profitability of the business will be stronger.

China is the world's largest consumer market. Although buying and selling business is still in the early stage of small-scale trials, the value of brand sales and merchants has been proven to be very good. There will be a very wide range of growth in the future. We are full of confidence in this. We will quickly form a local-specialized first-hand and second-hand product, bring real-time trade improvement to merchants, and at the same time bring value and convenience to users.

Over in Maya, we have been further enhancing the product and service model. It's gained more recognition from offline merchants. GMV reached RMB 473 million in the third quarter, of which the offline contribution almost doubled Q1Q to 185 million. China is the world's largest consumer market. Even though Maya is still in early pilot stage, the impact it brings to brands and merchants is undisputable and the growth potential immense. The buy-now-pay-later model is different in China. Maya will shape its own local identity and unique value, bringing tangible transaction gain to merchants and benefits to consumers. Also worth noting is the support to small and micro business owners. We are fully aligned with policy direction and increased the loan origination to this group by 32% Q1Q to 5.2 billion. Finally, I would like to reiterate that quality growth has always been a top priority at Lexin. We committed to optimizing the asset structure, enhancing credit quality and operational efficiency, and keeping our four-year target unchanged. We will also continue to explore and develop new products such as Maya and T-Bank technology service in order to strengthen our competitiveness and profitability in the long run. Thank you for your attention and support. Operator, we will open up the floor for questions. Can you please repeat the instructions again?

Certainly. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. Once again, to ask questions, please press star 1. Please stand by while we compile the Q&A roster. First question comes from the line of IV2 of Nomura. Please go ahead.

Hi, management team. Thank you for giving me this opportunity to raise a question, and congratulations on the strong results. I have a specific question for our new CFO, Sunny. I was wondering if you would be able to give us more guidance on the loan origination amount and the outlook for fourth quarter this year. Thank you.

I didn't get the name. Ivy. Ivy, hi. Good morning, Ivy. Thank you very much for your question. For the outlook, as you just said, and as we reported, we had a very strong performance of the third quarter. And based on the information at hand, currently, we will maintain our full-year guidance on the loan originations. And we do expect maybe some temporary volatility on the operation matrix, as all the players along the value chain will take a bit of time to adjust to the 24 new policies. For the fourth quarter, as we emphasized, we'll continue to place healthy growth over pure scale, and we're also expecting that new growth areas will make higher contributions, perhaps in the long run. So overall, we will maintain our outlook for the full year, and also we will focus on structural changes, as we just mentioned, and also on operational efficiency. Thank you, Aichi.

Yeah, thank you. Thanks for the guidance.

Thank you for the question. Do you have any follow-up?

No, that's it from my side. Thank you.

Certainly. Next question comes from the line of Alex Yeh of UPS. Please go ahead.

Hi, good morning. Thanks for taking my question. I have two questions. Firstly, so you have mentioned that your current pricing mix is about 50%, under 24% of the industry. I'm just wondering when do you expect our pricing transition to finish and fully comply? And also related to that, when do you expect you could probably you're more comfortable to resume growth after that adjustment. And second question is on your asset quality. So I have seen your early indicators to FPD ratio picking up a little bit in Q3. So I'm just wondering if you could give us some color on the reasons and also give us some forward-looking outlook. Thank you.

Alex will get Jay to take your first question, and then Jayden will take your second question. Jayden, do you want to answer the 24th question first?

Okay, I think this policy of the 24th, we have already talked about it before. This is a window of guidance for local regulators to banks. It requires some financial institutions to stop the 24th business before June next year. But not all financial institutions have received such guidance. So I think the adjustment of the 24th It may be before June next year. I think our entire structure will be adjusted. And we are still accelerating this adjustment trend. So I think even after June next year, I think there is still a certain amount of financial institutions in the market that may do this kind of business. So I don't think 24 does not have a complete time requirement. This completely depends on the views of various financial institutions on this matter.

As I mentioned in the past, the 24% policy is a window guidance given by local authorities to some of the financial institutions, asking them to complete by June next year. But of course, not all financial institutions have received such window guidance. As to Le Xin herself, We do target to finish the transition by June next year, and we're going to speed up the process. But of course, since not financial institutions, they are told to do so. So next year for the market, there might still be some doing like 24 after the June deadline.

Let me add one more thing. Regarding the 2.4 adjustment, actually, last quarter, we also told you that we are adjusting the 2.4 structure as much as possible uh uh While we are doing this structure change, the idea is to bring down the risk as well, so as to minimize the impact on tick rate. And you can see that from our three key results, we've been able to keep tick rate steady. And for the newly acquired borrowers,

within the 24%, the tick rate is above 3%.

That's why we are confident that we will be able to maintain tick rate at a healthy level after the transition next year. Okay, I'll take the next question. As I mentioned in the call earlier,

In the transition period, we do expect some volatility in short-term risk because the industry is moving to reduce funding price at about 24%. As you notice, the FPD30 release is picking up, but still maintained under 1%. As we keep focusing on improving our asset quality mix, going forward, we do expect that our long-term risk will continue to to be maintained at a relatively stable level. And we have also noticed that for new acquired customers, the new orders placed with pricing at or below 24%, actually the FPD7 is well below the general population of our entire portfolio. So that is a good sign because we are acquiring high-quality customers as the percentage is going higher in the next couple of quarters. As Jay mentioned, once by the end of the second quarter next year, we believe our short-term risk will continue to be maintained at the previous level.

Thank you. Thank you. Next question comes from the line of Ethan Wang of CLSA. Please go ahead.

Thank you. Hi, management. I have two questions. The first one is the requirement by PBOC to disconnect our data feed with funding partners early but through the license. credit agencies or in Chinese. So just wondering, in our case, do we have a timeline to make the change? And right now, are we working with any one of those licensed credit agencies already? And which one is that? And the profit sharing, the amount of profit sharing in the future, because that may affect our take rate a little bit, and maybe more importantly, the details of this collaboration, because with one another layer in the middle, does that mean we need to change the way we collect data and the way we process them and the way to handle those data? So that's the first question. My second question is on some data, or disclosure. So we do see a lot more disclosure from this quarter. So we really are really appreciated of that. But it seems that there are two things that are missing, which were reported in the past. One is the percent of profit share model of the total loan automation. So there's a chart there, but there's no numbers. It's kind of difficult to understand the exact percentage, and the second one is the funding cost in the third quarter.

Yeah, thank you. Thank you, Jayden. Jayden, you have two questions. Ethan has two questions. The first one is about the end of the year. He wants to see how our preparation is going. We have a timetable, our plan design. The second question is about the disclosure. He wants to know how much our division model is, and the funding cost per quarter. Ethan, Jayden is going to take your first question, and then Sunny will do the second one.

Thank you. So I'll take the first question. Due to the new requirements from PBOC, we are actually actively working with the credit bureaus, especially by hand. We have actually, after a couple of negotiations, we have already drafted a plan, a detailed plan, to work with Bai Hong and a financial institution, but at this time I cannot reveal the name of the financial institution. So we expect by the end of this year we will actually implement the new schedule according to our plan. Once this works, we plan to propose the plan to PBOC and see if it can be approved by the regulators. So that's our plan. But in the process of this implementation, we do not expect any change to our cost because this is actually a test pilot program for them and for us too. So we agree that during this test pilot progress, we actually will not incur any cost to, you know, to the data actually transferred or to any implementation that we carry through. So that's the current plan. But going forward, once the plans get approved by PBOC, we still expect very minimal change to our cost structure because Bai Hong or Pu Dao are actually positioned as an infrastructure. So as a credit bureau, or infrastructure institution, they do not aim to make profit because of this change. So I do believe the cost once it's incurred in the future is actually going to be very minimal to our underwriting process. Thank you.

For the second question, the first one I understand is regarding the contribution percentage of Sunrun or profit sharing. The profit sharing business contributed 43.7% of the overall GMV in the third quarter. The second question about the funding cost is that thanks to the efforts of our fund sourcing colleagues, the funding cost has remained very stable at 7.4%. Thank you.

Sure, very helpful. Thank you.

Thank you for the questions. Next question comes from the line of Ryan Roberts of Navis Capital. Please go ahead.

Hi, good morning. My question is kind of on Maya a little bit. I think some of the earlier numbers on volumes look pretty promising. And I want to just kind of check on the evolution of that business model. I believe that is kind of more on a merchant side. And I was just curious, number one, if you could share some more color on that, on how the development is going. And number two, on kind of the borrower user side, so to speak. if you're seeing any synergy in those users that choose BNPL services and how that might interact with your lending business and your efforts to drive loan growth from higher quality borrowers. I believe earlier you said those were typically high quality potential customers that use BNPL. I'm just kind of curious how that's all shaking up. Thank you.

The question is about the two parts of the purchase. The first part is that we want to see some changes in our business model and the cooperation with the customer. The other is to look at the user side. In terms of the user side, can we put this side, because we mentioned before that their quality is better, can we give them the part that we care about? Okay, I think the purchase of this business, actually,

We are still in the stage of verification. I think this is actually the case. In fact, we have been testing until now. We mainly focus on the entire Shenzhen and Guangdong regions. We also tried to open a few malls abroad. The overall effect received so far is still good. And we can clearly see that during the National Day or Mid-Autumn Festival, We use the whole store of Maiya to compare with the other stores of this brand, its entire sales performance has been significantly improved.

Maiya is still in a pilot phase. At the moment, most of our focus is in Shenzhen and Guangdong province, but we have been exploring some outside cities with shopping mall partners, and the feedback has been promising so far. And the feedback has been that during festivals such as National Day Holiday and Mid-Autumn Festival, if we look at for the same merchant for their outlets that work with Maya versus those outlets without such cooperation, we see an obvious uplift in the transaction contribution to them. 这是基于这样的一个可以给商家带来额外的一些增量的一些价值

So in this quarter, we have already seen that there are a lot of commercial businesses that are starting to pay for the trial. And our fees for the business will probably be at three to four points. The entire fee for different businesses is different. And we can see that the entire risk here is very low. We can see that our entire FPD7 reserve rate is a thousandth of a whole risk. So, and this group of people is very good. So what we are seeing now is that the majority of our buyers are more inclined towards the high potential consumer group of women. So I think we are still trying to get more buyers. We hope that we can help the business during the four-point period to increase the overall resale rate. We can also have more conversions, so that we can consider large-scale expansion. What we just talked about is that buyers have very good risk, and these users are very consumer-friendly users. Will we ask these users to pay the rent? I don't think we will consider paying rent to these users now. I think so far, I think buying is still a very valuable consumer tool for consumers, because it is free of charge. So emerging partners

They have a trial period, and we've seen a strong response to conversion after the trial period into a paying customer. And the fee that we charge is between 3% and 4%. And in terms of asset quality, when we look at SPD-S7, it's very low from offline emergence. It's in several basis points. And customer profile, mostly female with strong spending power. So at the moment, you know, our focus is on bringing, you know, the value to the merchants to making sure that we can help them improve their transaction activity, repeat sales, and then to improve the conversion before scaling up. And at this moment, we will also not be considering bringing the Maya users into the loan facilitation business because right now, our focus is on, you know, improving the merchant value and also, you know, like, making sure that this remains a very important retail consumption tool to the users before we move into the next phase.

Sure, thanks.

Thank you for the questions. Next question comes from the line of Richard Hsu of Morgan Stanley. Please go ahead.

Two questions for me. One is, Any plan to reduce long-term interest rates to 20% given there's some rumored guidance in some regions? Secondly, is any detailed cooperation plan with Baihan at the moment? Thanks.

Then I think that actually, the Security Council has some window of guidance for the entire interest rate to specific financial institutions. But our business nature is different. What we actually do is consumer finance. The entire consumer finance attribute is actually the interest rate of 24. I think this is actually not only in line with China's state situation, but also in many countries around the world, we all agree on such an interest rate. So it is different from the entire interest rate of an enterprise. Because this interest will affect the financial cost of the entire enterprise. And we think that in fact, the interest of 24, there will not be any further clear requirements for people to go down to how much. This is actually going to modify a bigger law. Even last year, when we saw the highest law requiring APR 15.4, the Bank of China still implemented this requirement of 24. So to date, we have not received a request for 20, and we have not heard of a request for 20 in the past.

On your question about the 20%, that one guidance, We have not heard anything from the regulators about that new level. First of all, for CBROC, they have always set this 24% level for commercial banks, even though there's some local window guidance for different financial institutions. But then you have to look at the nature of a business. We deal with consumer finance. And the 24% level is in line with policy and also global level. This is not like SME business. which, you know, is at a different level. So that's why we do not expect further tightening on this level from regulators. And also last year, you could see that from the Supreme Court decision about that, you know, 15.4% on the LPR at that level. CBRC is still sticking to 24%. Right.

And then based on today's ability for Lexin's entire customer group and our risk management, We believe that in the future, we will be able to withstand the limit of the entire interest rate. We have done the calculation ourselves. In fact, I think that more than 15% can achieve profit. I think there is still a lot of room here. Why do we say more than 15%? We see that our entire capital cost is about 7%. I think that if we want to further reduce the interest rate, it means that we need to further reduce our risk, and choose our better customers. So we think the whole risk has the ability to do three to four. So our entire operating cost is basically two to three. So this adds up to actually as long as it's 15, make sure the whole field is more than 15. In fact, for Le Xin, we have no problem with maintaining a stable profit.

When we look at our risk management and also our customer base, we're confident that we can still make a profit when loan pricing goes down to 15%. Let me give you our numbers to illustrate this. Funding cost at the moment is about 7%. And if loan pricing goes down, that means that our risk preference will also go down. So our risk cost will go down to 3% to 4%. And for our operation expenses, it's going to be about 2% to 3%. That's why we're confident that even though we don't believe that a 24% rule is going to change, but if it goes down, we'll still be profitable.

I'll briefly talk about the second question.

So the project with Bai Hang has three phases. We are currently in phase one. So phase one is to, you know, actually we've been working very closely with Bai Hang and the financial institution regarding the details of the plan. So right now we have agreed on the specifics and all the key milestones of the project, and we are going to sign a project contract to get it implemented around the end of this year. So this is phase one. Phase two is implementation phase. So we expect the entire project to be completed around the end of this year or early next year in the first quarter. So once the plan is implemented successfully, phase three is to get the whole plan approved by PBOC. So we're going to put together a document you know, propose to PBOC and see if this plan can be approved eventually. So that's our current progress. Thank you.

Okay. Just one quick follow-up. When do you expect the plan to be approved? You know, when do you plan to submit the plan for approval to the PBOC?

Right. We do not have a specific date to submit the plan. But, you know, if everything goes smoothly, we expect, you know, to get maybe a first round of, you know, submission towards the end of this year or early next year. Got it. Thank you.

Thank you for the questions. As a reminder, if you'd like to ask questions, you can press star 1 and wait for a name to be announced. We have a new question from the line of Hans Fang from CLSA. Please go ahead.

Thank you for giving me the opportunity. I would like to follow up on the question that Mr. Xu asked earlier. Can we talk about the specific method in this section? If we cooperate with Baihang, what kind of data do we pass to Baihang? Do we also give the algorithm to Baihang? What kind of product does Baihang produce for the bank? Can you tell us more about this? So my question is a follow-up on the decoupling of data fit from fintech to banks. So when you collaborate with Baihang Credit, can you elaborate in terms of what kind of data you're going to pass through to Baihang? And do you also pass the algorithm to them as well? And what types of products generated from Baihang which can be passed to banks? Yeah, just some details. Thank you.

Right now I cannot, you know, say exactly what the plan is because, you know, some of the details are still, you know, underway. And there are some, you know, back and forth discussions with Bai Hong at the moment. The reason is, you know, to be fully compliant, as you mentioned, eventually the algorithm might be placed at the, you know, at Bai Hong's side. But right now, I mean, due to the technical problems capability, and based on the evaluation of the time it would take for us to implement the whole process, it's way too complicated for the financial institutions and for Baihan. So right now, the plan is to actually transfer all the required data to them, and they will actually process the data and eventually transfer the process data to, you know, our financial, you know, cooperative financial institutions. That's a process. So basically, it's not just a, you know, for Bai Hong, they do not just act like a transitional institution. So what I mean is they do take an active role in this process. We transfer the data required by PBOC to them. They actually take... you know, some processing of the data, and they transfer the processed data to the financial institutions. That's actually how this plan would work eventually. But as you mentioned, in the future, according to PBOC, we still need to wait for the instructions. You know, eventually, the algorithms might be placed by home site. Yeah.

Thank you.

Thank you for the questions. Once again, to ask questions, you may press star 1. At this time, there are no more questions from Deloitte. I would like to hand the call back to the management for closing remarks.

Thank you, everyone, for your time and interest. We'll wrap up the call here, and we look forward to speaking with you. Thank you.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.