LexinFintech Holdings Ltd.

Good day and thank you for standing by. Welcome to Le Shing FinTech fourth quarter and full year 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 have any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Ms. Patricia Cheng, Head of Capital Market. Please go ahead.

Thank you. Good morning. Welcome to Le Xin's fourth quarter and full year 2021 earnings call. I'm joined today by CEO Jay Hsiao, CFO Sunny Sun, and CRO Jayden Chow. A quick reminder before we begin. During the call, we will discuss business outlook. Any forward-looking statements that we make on the call are based on assumptions as of today. The actual results may differ materially and will undertake no obligation to update any forward-looking statements. And unless otherwise stated, all numbers mentioned are in RMB. I will now turn the call over to Jay. His remarks will be in Chinese and English translation will follow.

Jay, it's your turn. Hello, everyone. Welcome to Lexin's press conference. I'm very happy to share with you our thoughts on external environment, industry development, and Lexin's as well as some of the optimistic views of the industry. In the short term, the macroeconomic environment will face fluctuations and changes, and uncertainty will increase further. In this year's two government reports, the economic growth target of 5.5% has been set for the past 30 years. In the past year, we have also been affected by geopolitics. The stock price of Chinese enterprises listed in the US companies has been greatly fluctuating. The market sentiment and the basic face of the enterprise

Good morning. It's my pleasure to share with you my thoughts about the macro environment, industry development, and our business development. The macro environment will likely remain volatile in the short term. As you can see from the two sessions meeting, China has set a GDP target of 5.5%, a record low for the past three decades. Besides, in the past year, because of geopolitical tensions, Trading in U.S.-listed Chinese companies has been very volatile, with market sentiment further moving away from company fundamentals.

especially the entire management of the regional banks. We also see that the Internet is strengthening some of the monitoring and information protection of the platform. In the face of some changes in the public environment, we mainly deal with three aspects. First, we want to reduce the service ratio of long-term customers. Second, we want to increase the management of the number of customers. Third, we want to look for a national fund to improve the accuracy of the funds.

There have been major changes on the regulatory front, such as the cap on loan pricing at 24 percent, the restriction on the geographic operations of regional banks, and also more scrutiny on Internet platforms and the personal information protection. So far, you know, we have been very actively responding to these changes. And mitigating measures include reducing our exposure for non-TEL customers and focus on existing customers. Also, to broaden the relationships with financial institutions, targeting more nationwide funding, and to enhance our ability in asset liability matching. And also to work out new risk model to strengthen the compliance in response to personal information protection.

In the long term, however, the demand for consumer finance is still high. It is still the basis of business growth. In China, the demand for consumer finance users in the second-tier cities and below will reach 65 percent. In the short term, the entire scale of consumer loans will reach 60 million yuan. In the future, China's current consumption index is also expected to reach 14 percent. In this context,

In the near to long term, the demand for consumer finance remains solid, and the growth fundamentals remain attractive. We see strong potential coming from a Tier 2 of the lowest studies with the cohort making up 65% of the consumer finance population, and the market reaching 6 trillion RMB. We also expect strong growth in the next few years.

In such an environment, we need to find new growth points. In the current industry, consumer consumption must comply with stable management and grow in a high-quality customer base. We will further innovate in the customer model. As the entire increase in online customer costs increases, we will focus on the offline customer. Second, we need to innovate in customer service. Customer management will become a key force in our entire future. The third, we will also expand our entire capability. We will expand our capabilities in the past in terms of customers, seal control, and so on. We will also expand to banks to become a new business growth point. We will be able to further develop on platform construction. We will take advantage of the entire needs of the core customer group. We will continue to innovate in order to strengthen our competitiveness and compliance and also to look for new growth opportunities. In customer acquisition, we will expand more into offline channels

to breadth and depth of the offline channels as online becomes more expensive. In customer service, we'll also enhance the management of existing customers to drive further growth. And also, we'll be monetizing our core capability. We will look into generating new revenue from exporting our niche in customer acquisition, risk management to financial institutions. In addition, in the platform business, we'll be also developing it. We'll be leveraging our insights into consumers to further build our e-commerce and to-be solutions.

Lexion 2021年主要的財務和經營指標,我們的貸款規模2020年上升了21%,達到了2138億,基本符合我們年初預定的2200億左右的目標。 Although 24% of the price adjustment in the second half of the year brought a certain operating pressure, but our overall income and last year's basic balance reached 11.4 billion RMB. In 2021, our net profit of more than 230 billion RMB was the highest annual net profit since the establishment of the company, showing a good and quality growth of the company. The company has also introduced 21 high-end talent, determined to use technology and professionalism as the main driving force for future growth.

Next, let me give you an overview of our achievements in 2021. Our loan origination volume grew by 21% year-over-year to RMB $213.8 billion, in line with expectations set at the beginning of the year. While the 24% policy put pressure on our operations in the second half of the year, full-year revenue was largely stable at $11.4 billion. Our net profit for the full year reached a record high of 2.33 billion RMB, reflecting a quality of focus. We have also brought in some 20 top talent in recent years, demonstrating our commitment to drive growth with our R&D investment.

In the process of embracing the new monitoring policy, although the business has some fluctuations, our progress in all aspects is still relatively smooth. That is, some of our core business indicators Compared to Q3, there are some fluctuations, mainly because the financial side needs to adapt to regional policy adjustments. The price of 24% changes the entire behavior of the consumer, and it will also raise new requirements for our model. The price drop will cause some pressure on the current income and profits, but we did not shake the core advantage of the six core advantages. Looking back at the past six advantages, will continue to support the success of our entire sales and financial business, and it is also an important opportunity for the future development of Lexin. Our six financial capabilities are mainly technical-driven precision, risk recognition and management. Second, the relative information advantage formed by the storage of data in the past eight years. Third, the internal and internal flow of the consumer scene with its characteristics. Fourth, the multi-point and multi-point acquisition of both online and offline. Fifth, and long-term cooperation with the financial institutions. Sixth, the client-to-client detailed operation.

While there will be fluctuations in the change process, we continue to focus on the compliance. There's some slowdown in the quarterly trend due to our banking partners adjusting to the new regional policy, and also the 24% pricing cap changing the consumer behavior, and also the risk model has to be fine-tuned as a result. The drop in pricing as a result affected both revenue and profit. Nevertheless, the six core capabilities of the machine remain intact. Number one, our technology-driven risk identification and management. And number two, our data advantage from over eight years of experience. And number three, we've been creating a traffic loop from proprietary consumption scenarios. And number four, multiple touch points online and offline for customer acquisition. Number five, stable funding relationship with financial institutions. And lastly, more refined customer cementation. And these will continue to drive our success in the future.

using the fastest speed to find a balance point under internal and external pressure. We will use higher compliance requirements to self-discipline the business process and establish a self-developed group management system to continue to improve our comprehensive risk management system. We will also further optimize our funding source configuration, especially focusing on expanding national resources and fully utilizing ABS and other capital market tools to protect the entire effective supply chain of funds.

This year, 2022, is a pivotal year in nursing's transformation journey. We'll continue to strengthen our competitiveness and compliance. We'll step up our compliance, and we'll also step up customer management and also risk management, and also our funding efficiency. We'll continue to optimize our funding structure and cost, to broaden the cooperation with financial institutions, to introduce more nationwide funding, and to expand into new channels like ABS. This year, we will continue to optimize our asset liability structure, enhance digitalization in our operations, and expand into new opportunities. We expect low origination volume to increase by about 10% this year. We're confident that we can complete the execution of the 24 policy and to keep a four-year take rate above 3%.

Although the external environment is uncertain, the management team is still confident in achieving the goal set for the year. We firmly believe that doing the basics and achieving strategic transformation is the way to achieve shareholder value. Due to this, the current share price is low and the company's actual value cannot be reflected. Although the external headwinds remain, we're confident that our full-year target will be met.

We're committed to strengthening the business fundamentals, and achieving strategic transformation is critical to driving shareholder value. We believe the current share price fails to reflect the value of the company. With the authorization of the board, we have adopted a share repurchase program which will allow us to repurchase up to $50 million U.S. dollar worth of stock in the coming 12 months. Next, Sunny will go over the financial results. Sunny, over to you.

Okay. Thank you, Patricia. Good morning, everyone. Before talking about Le Xin's fourth quarter and the 2021 full year results, I would like to, first of all, thank you for attending our call and your continued interest in Le Xin. The year 2021 was a year full of challenges. For companies operating in China, policy changes were a constant companion regardless of the industry. Amid these difficult times, we delivered a solid set of results with profit reaching new highs for the full year. The progress from the pricing policy change is also encouraging. Let me start with the update on the 24 policy. For the fourth quarter, the average pricing for our loan origination went down to 25.8% versus 27.3% in Q3 and over 28% in Q2. About 59% of loan origination in Q4 was priced within 24%, up from 43% in Q3. Our strategy has been to gradually bring down APR to 24% over 12 months. The assessment at the midpoint of the process progress confirmed that we're on track to meet the target by June 2022. The adjustment does come with short-term pain. The amount of long-origination achieved in Q4 was 43.6 billion RMV, representing a quarter-on-quarter drop of 22%. The result was below our earlier expectations. risk appetite from Chinese financial institutions became more subdued towards the end of the year. There was the lower loan quota towards year end, a seasonal pattern. This year, two additional factors came in play. The shift to reduce funding price at above 24% almost across the board and constraints on geographic exposure for regional financial institutions. Like our peers, we also experienced a sequential decline in loan volume. Lower loan volume and lower loan pricing at the same time means lower revenue. Operating revenue fell 26% to 2.2 billion RMB in Q4 from 2.97 billion RMB in Q3. The impact on gross profit was smaller. Gross profit decreased by 19.5% quarter on quarter to 1.2 billion RMB in the fourth quarter. Gross margin held up well, rising to 55.1% in Q4 from 50.7% in Q3. This reflects the improvement in quality of new loans. Though top line numbers have been hit by external headwinds, the measures taken in safeguarding asset quality have proved effective. My colleague Jayden will elaborate on this later. The other thing we have been working on is how we manage our organization. The nature of lending will always subject us to external forces that are outside our control, such as interest rates, liquidity, all these macro trends. We have been beating up internal management to boost our defense in these uncertain times. We continue to invest, especially in technology, ramping up infrastructure and know-how so we can have a stronger back end be more efficient in operations and more equipped to address new opportunities at the front. RMB expenses increased 72% year-over-year and 25% quarter-over-quarter to 164 million RMB in Q4. Total operating expenses fell 16% quarter-over-quarter to 610 million RMB. discipline, and efficiency will remain our goal. Moving on to the bottom line, for the fourth quarter, net profit was 256 million RMB. The industry's response to the change in policy environment largely began in the latter part of Q3, and therefore, the disruption became more evident in our results in Q4. For the full year, we overcame the slowdown in the second half and achieved a net profit of 2.3 billion RMB, 292% higher year over year, and setting a new record for the company. While some of the uncertainties surrounding our sector are still around, we believe this year things will likely stabilize. We are in constant dialogue with the regulators to better understand their intentions and how we can cope and continue to move forward. The business is taking on new dimensions as we expand into new areas. From a 2C focus to more interactions with 2B, i.e. business, and 2F, i.e. financial institutions as well. This integral approach is what sets nursing apart from competition. Our customer-centric ecosystem spans from lifestyle to finance, giving us more points of access into 2C, which in turn leads to broader and deeper relationships with business and financial institutions. We're going through unprecedented times. there will be volatility in our operation. But as Jay outlined earlier, the strategic roadmap and operational priorities have been well-defined. With the foundation solidly laid and the agility of the team to respond, we are fully confident that we can move the business forward and continue to deliver quality performance. I will now hand over to our CRO, Jayden. Thank you.

Thank you, Sunny. The year 2021 put our team to the test. It's one of the most challenging times as we are working with policy tightening and macro slowdown at the same time. Following the introduction of 24% pricing cap, financial institutions have been moving away from serving a meaning part of the market. Especially in Q4, it has definitely been a very tightening period from money supply perspective in the financial system. When liquidity goes down, repayment ability of borrowers goes down as well. The 30-day plus delinquency ratio finished year at 3.99% versus 3.68% at the end of September. The 90-day plus delinquency ratio increased by seven basis points to 1.92% in the same period. The pressure on asset quality can be felt across the whole industry. As we started the process with a higher proportion of customers priced at above 24%, we expected to experience more volatility in the adjustment process. We did experience interruptions, but so far we have managed to keep the asset quality trend in line with or better than peers. The results reflect our prudent approach and the strengthening of risk management across the board. At the front, we have revised the acquisition strategies, scaling back from relatively low-quality online channels and expanding the offline Puhui team. As the addressable market is rejoined, we have been continuously refining our risk models. In the middle layer, portfolio management has been enhanced to strengthen customer segregation and real-time risk monitoring. We have also stepped up the collection effort for the late bucket of overdue loans. The pressure on credit quality is going to remain in the near term as we still face the pressure in the policy and the macro environment. Nonetheless, signs of improvement in early-day performance indicators have begun to emerge. The restructuring of the asset mix is still ongoing, but once we get through the transition, we are confident that the business can enter a new chapter. Thank you.

Thank you, Jayden. Operator, we can now open the line for questions.

Thank you very much. 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. Please stand by while we compile the Q&A roster. First question comes from the line of Yada Li of CICC. Please go ahead.

Okay, first of all, thank you for giving me the opportunity to ask this question. I am Li Yada from Zhongjin Company. There are two small questions I would like to ask you today. The first question is about the transmission mechanism of our credit related data. Have we already started this collaboration mode with financial institutions or credit institutions to go to the experimental stage? Or are we still in the early exploration stage? If you want to predict the end result of the final plan, when can it be? Then I'll do the translation. So the first one is about the transmission mechanism of data related to the credit reporting thing. How we started to experiment the cooperation with financial institutions and the credit bureau? And are we still in the exploration stage? And when can we expect the implementation of the final plan? And the second one is regarding our risk matrix. I've noticed that the delinquency went up, and I was wondering if you can elaborate more about the underlying reasons. And for 1Q22 and going forward, can we expect to see an improvement on the risk matrix? Thank you.

Thank you, Yada. Jayden will answer your two questions. Jayden is going to take another question.

Okay, I will answer the first question first. Actually, at the last press conference, I have already mentioned that since the confirmation of the relevant market information, we have started to discuss the relevant design of the cut-off chain with various credit institutions. At the same time, we have followed the first rule of law. Last December, we passed the review of the short-term joint design and development of Baihang Zengxin. The system is already on the line within Zengxin. Currently, we are actively discussing and confirming with financial institutions. We expect that at least 100 million financial institutions will be established in the first half of this year. At the same time, we are still communicating and discussing with other Zengxin institutions and financial institutions. Okay, so ever since we get the information for disconnecting from direct transition of data credit bureau data to financial institutions we've been in active discussion with different credit bureaus and financial institutions and we take compliance as first priority our plan and design of This schedule has been passed the test and approved by Baihan Credit Bureau, and it has been online since the end of 2021. Now we're in active discussion with at least one of the financial institutions, and we expect that before June this year, we will complete the cooperation between a credit bureau, our platform, and at least one financial institution. At the same time, we're still in discussion with other credit bureaus and financial institutions to push forward this plan. And the mode of our plan is for Le Xin to upload all relevant information data to the credit bureau. The credit bureau will do the data processing and output the end results to the financial institutions. It's more like what, you know, the scheme that works in Europe and the United States. Last but not least, the PBOC has not given us a specific deadline for putting this plan in place. So based on our current schedule, we are very confident that before June this year, we'll be able to implement a plan at least with one financial institution. As for the second question, as I mentioned in the press conference, the overall risk of our industry has increased this year. We have seen the same situation. However, from this year, especially from this year's early indicators, we have seen that our current risk quality has clearly improved. So, as Jay just said, this year, through our優質貨客, We will increase the proportion of R4 as soon as possible. At the same time, our risk will be improved faster. There is one thing I want to mention. Although Yada may see that the index of Q4 has risen, but if you look at Q3, the 30 of Q3 compared to Q2, will have some changes, so it will bring pressure to the whole growth of Q4. This is why we have specialized management of our late users in Q4. In this respect, the control over the entire indicator has been very good. If we look at the increase in proportion, this indicator is actually better in the industry. Okay, now I'll do the translation. Okay, okay. So, as I mentioned in the conference call, the risk performance has fluctuated across the industry and so did we. But we have noticed that from the beginning of this year, especially early stage risk indicators have begun to improve quite significantly. As Jay mentioned in his part of the conference call, as we continue to increase our online and offline acquisition channels, as we continue to refine our customer segregation and risk strategy and modeling effort, and also by enhancing our cooperation with large and high-quality financial institutions, we expect that this year we will increase the proportion of our high-quality customers, especially customers priced at or below 24%. And our risk performance will continue to increase at high speed. Thank you.

Thank you for the questions. As a reminder, to ask questions, please press star 1 on your telephone. Next question comes from the line of Ethan Wang from CLSA. Please go ahead.

Hello, Mr. Wang. I have two questions. The first question, I heard Jay talk about the funding cost this year. Will you consider using new methods, including ABS? So I would like to ask you about some of the detailed plans in this regard. For example, what is our specific target financing cost? How do you look at the entire financing cost level this year? The second question is about the platform service, which is capital heavy and capital light, as a comparison. Thank you. I have two questions. The first is on the funding cost. So, Jay has mentioned in his remarks that we're preparing to have some new methods to secure funding this year, including ABS. Just wondering, with that, over the course of the funding course and what our view on the future trend of our funding course going forward. And second question is on the platform versus capital heavy business model. We want to get some color on the percentage of the platform services in terms of launch nation in a fourth quarter. And maybe more importantly, is there any difference or maybe any discrepancies between platform and capital-heavy business model in terms of asset quality from our latest data? Thank you.

Okay, thank you, Ethan. Jay will answer the first question, and Sunmi will answer the second question. Jay, please tell us about the capital cost.

Okay, let me answer the first question. Yes, the ABS part. Yes, I think this year, in terms of our entire financing, our capital channel, we hope to continue to promote a diversification. So we are in ABS, including we are in There are some standard ABS and some non-standard ABS that are not in the public market. We will all be issued. But I want to say that this year we are in the direction of funds. The whole strategy of the whole focus is still to add more national funds because we just talked about ABS. This ABS is actually a fund that can be used throughout the country. So this year our focus is on ABS and the financial institutions of the whole country. We will increase the strength of the whole expansion. We know that in fact, last year we saw that the scale of our business was affected by a certain degree of our business. I think it's actually a big part of the reason. I think it's still the end of last year. Regional funds can only limit local business development, which will lead to a lack of compatibility with the entire funding and user demand. So this year we will focus on solving this problem. And we look at Q1 so far. We have basically solved this problem. At least at the moment, when we look at the supply of funds throughout the country, we have quickly followed up. And we can see that the entire funding market this year is relatively active. So we expect that the entire funding cost this year and last year will not have a particularly big change. Okay, go ahead. Okay, thank you. I'll add to what you said first.

We'll look into expanding our nationwide funding this year. For the ABS issuance, we're looking into both standardized and also non-standardized, i.e., the non-public side of the ABS issuance. ABS, the channel itself, doesn't have any geographical constraints, unlike the regional banks. So that's why we're looking into doing ABS. Last year, in fourth quarter, Some of the slowdown in our loan volume, part of it was due to the constraints faced by the original financial institutions. So there was some mismatch in asset and liability. And looking into first quarter this year, the situation has much improved. And the nationwide funding volume has been going up. So looking at the funding cost for this year, we don't expect any much volatility versus last year.

Okay, thank you, Patricia. For the first question, ABS, I'm going to make some more additions. The first one is that last year, as I just mentioned, we issued three sets of ABS. So the overall situation is relatively smooth. However, from the end of last year to the beginning of this year, some local governments have made some changes launch, there is a little bit of slowdown. So, the whole of this year's ABS launch depends on the overall policy implementation progress. This is the first one. The second one is, the second question we just asked is, what is the difference in asset value between our divided funds and our borrower funds? I understand it is such a question. Then, In the end, there is no significant difference. The asset value of the division is slightly better than that of the mortgage.

That's it. Let me translate. We did three ABS issuances last year, but towards the end of the year, the market became a bit calmer. There was some slowdown towards the end of the year because of the reservation of some local governments. And for the target this year, it depends on the policy development. And on the second question about the difference in asset quality between the profit-sharing model and also the capital-heavy model, in terms of the asset quality, for the profit-sharing model, it's slightly better, but the difference is minor.

Thank you.

Thank you for the questions. Once again, to ask question, please press star 1 and wait for a name to be announced. Once again, to ask question, please press star 1 on your telephone. At this time, there are no further questions from the phone line. May I hand the call back to the management for closing remarks?

Thank you. We're going to conclude the call here. Thank you for your interest in Le Xin. You can find our contact information on our IR website. Do feel free to get in touch if you have any follow-up questions. Keep well and see you soon.

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