LexinFintech Holdings Ltd.

Thank you all for standing by and welcome to the Lexin FinTech second quarter 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question at that time, you'll need to press star then one one on your telephone keypad. Please be advised that today's conference is being recorded. And I'd now like to hand the conference over to your speaker, Ms. Echo Yeung, IAR Director of Lexin FinTech. Thank you. Please go ahead.

Thank you, operator. Hello, everyone. Welcome to Lexin's second quarter 2022 earnings call. With us on the line today are CEO Jay Xia, CFO Sunny Sun, and CRO Jay Ben-Qiao. Before we get started, I'd like to remind you that the call and presentation contain business outlook and forward-looking statements, which are based on assumptions as of today. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Jay will first provide an update on our performance. Sunny will cover the financial results in more detail. And lastly, Jade and Dan will discuss risk management. I will turn it over to Jay. His remarks will be in Chinese, and the English translation will follow.

Jay, please.

Hello, everyone. It is my pleasure to talk to you again and share our second quarter 2022 earnings performance.

In the second quarter, total loan originations reached RMB 49.1 billion,

up 13.9%, quarter over quarter. Total operating revenue was RMB 2,410 million, up 40.9%, quarter over quarter. Net profit was RMB 167 million, up 105.5%, quarter over quarter. Numbers of both active users and the new active users were higher than those in the first quarter. Funding costs continued to decrease and the risk indicators remain stable. Our CFO and CRO will provide more details later.

The growth of the second quarter is mainly due to our excellent performance in the June business. In June, the company accumulated 1.84 billion yuan. In June, the ratio of low-risk trading customers, JMV, increased by 15% in March. The quality of new assets continues to increase. In the second quarter, the price of new assets of 24% and below has exceeded 80%. we have the ability to meet all the regulatory requirements. According to the data, we have returned to a steady growth trajectory and the growth trend will continue.

The growth in the second quarter was mainly due to the recovered performance of our business in June. In June, the company delivered RMB 18.4 billion in loan origination. The contribution percentage of loan origination from low-risk trading customers increased by 16 in June compared with that number in March, while the risk of new loans was continued to be improved. By the end of the second quarter, the percentage of 24 MIPS was over 80%, and we are capable to meet all relevant compliance rules and regulations. The data in June has shown that we have returned to a steady growth trajectory, and the growth trend will continue.

The establishment of June is based on the immediate adjustment of the company's operating strategy. In the first five months of this year, the epidemic broke out and the macroeconomic pressure was increased. We adopted a more stable and efficient operating strategy without actively pursuing scale. At the end of May, as the epidemic prevention and control policy was adjusted, the social economy was restored. We gradually adjusted the strategy to increase the operating capacity of high-quality customers. On the basis of the huge number of users, we achieved a significant project.

The growth in June is mainly due to the timely adjustment of our business strategy. In the first five months of this year, with the resurgence of the pandemic and associated macroeconomic pressure, we did not only pay attention to the scale, but adopted a more prudent business strategy. At the end of May, with the adjustment of pandemic prevention policies and social and economic recovery, We gradually adjusted our strategy and further explored the credit potential of our existing high-quality customers. Based on our huge user base, we achieved notable results.

Specific financial strategy adjustments can be summed up into three main categories. First, increase the value of high-quality customers and gradually eliminate high-consumption users. In the past few months, especially in the 15 months of the pandemic, we have carefully issued loans and actively controlled the scale. Although the impact of the second wave of the epidemic is greater than that of the first wave, the overall risk of the company's performance is stable. The new asset quality is better. The 90 plus expected rate of 2.63% has been decreasing since December last year. In July, the average rate of the first wave dropped by 11%, and the 30-day recovery rate remained above 90%. In June, the new asset's early risk index dropped by 15% from May.

Specific business strategy adjustment can be summarized as three major initiatives. The first is to increase the proportion of high-quality customers while decreasing high-risk customers. In the past few months, especially in April and May, when the pandemic was severe and the macro economy was under pressure, we were prudent in loan originations and took the initiative to control the scale. Although the impact of the pandemic was, in fact, greater in the second quarter than in the first quarter, our risk performance was generally stable, and the quality of new loan originations was better. 90 days delinquency rate was 2.63%. The overall day one delinquency rate has continued to decrease since last December. And in July, it dropped 11% compared with the average number in the first quarter. The 30-day collection rate was consistently above 90%. Compared with May, early indicators of new loan origination in June have decreased by over 15%.

The second is to further increase the number of customers, including 1. We have launched a positive customer group of small town youth, urban white-collar, and other positive customer groups. Lexin's Puhui team plays an active role in promoting the advantage of offline personnel, to break through the stereotype of high-quality people and upgrade the joint modeling capabilities of the cooperatives, and further improve the quality of the client's progress, while introducing more high-quality data sources to strengthen the investigation capabilities of the multidirectional delivery people. Second, we effectively avoid the risks of changing customers' hair in different regions based on the impact of the epidemic. These two are also the main measures we use to deal with the epidemic, and they have become our long-term capabilities. so that we can better respond to future challenges.

Besides, we further improved the quality of customer acquisition. Number one, we have launched targeted high-quality customer acquisition programs for young professionals, small-town youth, and urban white-collars. Number two, Luo Xin Pui team has leveraged the strength of its offline staff to attract more high-quality customers for microloan Huile Dai products Number three, we have upgraded the co-modeling capabilities with partner institutions to further improve the quality of our applicants. And at the same time, we have introduced more high-quality data sources to strengthen our ability to identify cross-platform users. Number four, we adjusted the customer acquisition spend based on demographic differences in terms of the impact of pandemic resurgence. These are the main measures that we respond to the COVID resurgence and have made us better prepared to cope with challenges in the future.

The third step is to enhance the detailed operation of high-quality and high-end customers. Based on the user data and external data of the hot machine, we carry out customer classification and carry out a number of quantitative experiments to fully verify the effectiveness of the customer operation strategy. The business effect has been significantly improved. The experimental team and the trial team compared the contribution of the high-quality group to increase by more than 60%, and the up-value to increase by more than 20%.

Third, we strengthened the segmentation operation of existing high-quality customers. Based on the user data accumulated by Le Xin and external data sources, we divided the customer into several sets and have conducted several benches of A-B testing. to fully validate the effectiveness of the operation strategy of the sub-customer groups, which helped us to significantly improve operation efficiency. For example, the per capita contribution of the premium customer groups was 60% higher and Apple was 20% higher.

Specific errors include the fully enhanced coverage and application of the real-life model in the data. We have built a new model feature to improve the customer's recognition capacity by more than 25%. In terms of technology, we have improved the recognition capacity and operating efficiency of various models. We have upgraded the bottom-up PD risk model, which provides more reasonable group management for customers. The algorithm is optimized, and more data sources are introduced. The model recognition accuracy has been increased by more than 20%, and financial institutions have learned from the federal government. specific initiatives include number one in terms of data

we have comprehensively strengthened the coverage and application of the PBOC credit modeling, through which we were able to establish a new model that contains more complex label dimensions and improved the accuracy of identifying high-quality customers by more than 25%. Number two, in terms of technology, We have improved our user identification capabilities and operational efficiencies through various models. We upgraded our profitability of default risk models, and thanks to more precise customer segment management, authoring optimization, and the introduction of more data sources, accuracy of model identification was improved by more than 20%. We expanded the applications of external data with financial institutions in various ways, such as federated learning and the joint modeling, and improved the identification ability of late-bucket customer groups through model integration and the strategy application. To get self-developed user willingness model, marketing strategy model, et cetera, we can more accurately identify high willingness and high quality users. We were able to save advertising cost by 50% while achieving same long volume.

The business strategy and adjustment in June was able to achieve and achieve a good result. It is based on our four core capabilities in the past nine years. First of all, it is the ability of the user to operate. We strengthen the accuracy and progress of the quality customers. Through different products and services, we meet their needs at different stages.

The business strategy and adjustment in June was with good results, mainly due to the four core capabilities we have accumulated in the past nine years. First, user operation capability is mainly reflected in our accurate identification of high-quality customers and the segmentation operation, which allows us to meet different stages through different products and services.

Second, the ability of risk control is mainly reflected in our ability to continuously improve our user identification and operations.

We have introduced more high-quality external data, further analyzed internal user behaviors, iterate the risk control model at a pace, and continuously improve the efficiency and accuracy of hypothetical testing.

The third is funding capacity. Since February, the company's funding cost has dropped. In the past year, financial cooperation partners have continued to increase. Currently, more than 130 financial institutions have achieved cooperation.

Third, the ability of funding is reflected in our funding cost control and the partner expansion. Funding costs continue to decrease since February this year, and over the past one year, the number of other financial partners has continued to expand. Currently, we have cooperated with more than 130 financial institutions.

Finally, I would like to focus on data and technical skills. Lexin's R&D investment is leading the industry. The R&D investment is 1.5 billion yuan, and the growth rate is 18.5%. We have integrated many years of technical capabilities and upgraded it into a smart business engine. It can provide the enterprise with a set of tools for natural analysis and decision-making, and it can also help the business to do rapid delivery, greatly improve decision-making, management, and business operation efficiency. The smart business engine has brought Lexin real-time revenue. In addition to the detailed operation mentioned earlier, Finally, I would like to elaborate on data and technology capabilities. Lexin's R&D investment has been industry-leading. In the second quarter, we invested R&D 150 million in R&D

up 18.5% year-over-year. We have integrated the technical capabilities we have accumulated over the years and upgraded them into Lexin Smart Business MG. It not only provides a full set of intelligent analysis and decision-making tools, but also helps the business to conduct rapid operations and iterations. and greatly improves the efficiency of decision making and the business operation. Smart business engine has already taken effect in our daily operation. In addition to the aforementioned customer segment operation strategy, the smart business engine has also brought great efficiency improvements to our offline Huawei team. With the help of the digital operation tools of the engine, The contribution of each employee of our Puhui team has increased by 30%, and the scale of SMEs has increased by 50%.

Le Xin's strengths in consumption scenarios, customer segments, and full capabilities are integrated into our business.

which forms a self-reinforcing loop that we call it Lexin's Ecosystem.

Lexin's unique high-end, high-end, high-end ecosystem, Lexin's unique high-end, high-end, high-end ecosystem, Lexin's unique high-end, high-end ecosystem, And the improvement of technology and control capability allows us to further export the energy to the banks and merchants. The sharing of energy between banks and merchants also allows us to attract more funds and to expose the scene. The advantage of the scene allows us to get more high-quality people to start a new cycle. Lexin's business ecosystem is our unique long-term competitive advantage.

Lexin's unique high-frequency and high-repeat rate consumption scenarios, such as Suntilo and Maya, are an installment Payment e-commerce platforms put Le Hintz in the advantage of having more high-quality customers. A high-quality customer base will continue to increase the scale and the profit of Le Hintz's core business. The increase in scale and the profit of core business allows a large data branch to improve the model and the technical capabilities. The advanced technology and risk control capabilities allow us to further provide services to our financial institutions and merchants. Sharing capabilities with financial institution partners and merchants then allow us to connect with more funding pools and scenarios. The advantage of abandoned scenarios allow us to gain more high-quality customers and the cycle starts again. This is also our unique and long-term competitive advantage.

We are confident in our business strategy and long-term development. The company and management team shared repurchase programs remain in execution. CFO will provide more details later. Finally, I would like to talk about the decision-making in terms of corporate social responsibility. In the second quarter, the epidemic gave a lot of small and medium-sized enterprises and individuals the challenge of capital flow. To this end, we launched the small shop fire plan, through a series of measures to alleviate the financial difficulties of small and medium-sized enterprises. In the second quarter, the small and medium-sized loans amounted to 5.4 billion yuan. We will also take many measures to help customers who are seriously affected by the epidemic.

Finally, I would like to talk about Le Xin's corporate social responsibility initiative. In response to the pandemic resurgence in the second quarter, we launched a specific program, Xiao Lian Yang Guo, to help SMEs to deal with their cash liquidity challenges. In the second quarter, the amount of small and micro loans was 5.4 billion RMB. For SMEs, More affected by the pandemic resurgence, we also took a number of measures to help them hide over the difficulties.

Looking ahead, the recovery trend in June continues in Q3.

And our loan origination guidance in Q3 will be RMB $53 billion or above. This guidance reflects the company's current expectation, which is subject to change. Let me now hand over the call to our CFO for financial updates. Thank you.

Thank you, Jay. Good morning and good evening, everyone. It's my pleasure to speak to you again. Our business was under pressure due to unforeseen regional COVID surge in April and May, but thanks to the determination and effective measures taken by the government and society as a whole, the pandemic has been contained gradually. In addition, we are also encouraged and inspired by multiple macro-stimulus adapted by various government bodies that will boost consumption and credit them. We stay committed to our strategic priorities of enhancing and diversifying the revenue structure while strengthening operational efficiency and optimizing our risk assessment capabilities. Our sustained efforts on technology innovation and digital transformation have shown more visible results this quarter. Let me now go through some key financial performance of the second quarter. I'm delighted to report that total loan origination in the second quarter was 49.1 billion RMB, representing a 13.9% increase quarter over quarter. The outstanding loan balance stood at 86.6 billion RMB, representing a 3.3% increase compared with last quarter. While the management team is not completely satisfied with this top line result, we are encouraged by the positive momentum. Total operating revenue was 2.4 billion RMB, representing a 40.9% increase quarter over quarter. Revenue from new consumption-driven location-based services was 538 million RMB, an increase of 69% from the first quarter of 2022. and an increase of 32.2% from the same period of 2021. Revenue from technology-driven platform services was 436 million RMB, representing a 12.3% decrease quarter over quarter. Revenue from credit-driven platform services was 1.4 billion RMB, representing a 60.4% increase quarter over quarter. As you might have noticed, we reorganized our revenue segmentation since Q1 this year. This is a better reflection of the quality of our revenue and the diversified nature of our businesses. The contribution from nine credit-driven services was more than 40% of the total revenue this quarter at 974 million RMB, having grown at 19.4% quarter-over-quarter. This is in line with our long-term strategic goal of building up a more risk-tolerant and high-quality revenue structure. In compliance with government guidance, loan pricing in Q2 continued to fall and got closer to 24%. Until the end of June, MIPS within 24% APR reached 81.1%, a 3.3% increase quarter-over-quarter. Let me move on to the expense side of the second quarter. Sales and marketing expenses increased by 32.5% quarter over quarter, but decreased by 3% year over year to 477 million RMB. As you know, in Q1, guided by our quality over quantity operational priority, we scaled back our advertising costs, especially in areas that were likely affected most by COVID. This quarter, together with gradual improvement of the macro environment and the containment of COVID situation, we increased our marketing promotion expenses at certain level, compared with previous quarter to drive future growth, but still they cost overall spending. Research and development increased by 1.3% quarter over quarter and 18.5% year over year, to RMB 155 billion, reflecting our continuous investment in upgrading of our technology capabilities. G&A expenses went down by 3.3% quarter-over-quarter and 6.4% year-over-year to 130 million RMB. Just like the first quarter, it went down both year-over-year and quarter-over-quarter, demonstrating the continuous improvement of our operational efficiency. Net profit was 167 million RMB in the second quarter. This is a 105% increase quarter over quarter. Since we have taken a more prudent approach to reflect risk in the first quarter by setting up the day one provision, based on the current external situation, we expect that our profit will continue to follow an upward trend in the second half of this year. Next, quick updates on our share repurchase program. On March 16, 2022, the company's board of directors authorized a 50 million US dollar share repurchase program. As of June 30, 2022, the company had repurchased approximately 30 million ABS for approximately 31 million US dollars under this program. The share repurchase program demonstrated our confidence in the long-term potential And the management team remains open-minded about expanding the share buyback program in the future, should we deem appropriate, and as a way of giving back to shareholders. I'd like to emphasize our unwavering determination to see through both the current execution and the long-term strategy of adequate investment in technology and operational optimization as priorities to drive long-term sustainable business development. Finally, as we mentioned earlier and also mentioned by Jane, even though we have experienced some headwinds in the first few months this year due to the resurgence of COVID, we never stopped our efforts of advancing our capabilities in better serving our customers and advancing our business model. Looking ahead, based on the current information at hand, we are cautiously optimistic about the performance of second half. We expect the loan originations for the third quarter to reach 53 billion RMB. We will continue to pursue a sustainable and resilient business approach and will also be alert of any material signs of external changes that might impact our business and will reflect and will react quickly and responsibly. With that, I will turn the call over to our CRO, Jayden. Jayden, please.

Thank you, Sunny. Good morning and good evening, everyone. Let me elaborate more on the risk management front. In this quarter, we remain cautious on our credit risk approach with several major cities and their surroundings hit by COVID for the first half of the quarter. On our customer acquisition side, we have prioritized the quality over quantity tactic by adopting a more comprehensive and robust monitoring system, which allowed us to adjust our strategy in response to COVID more dynamically throughout the process from acquisition to portfolio management. We have been seeing positive results from such action as our risk level was controlled to a rather small rise compared with our peers. The overall day one delinquency rate has been down for seven consecutive months and down by 11% compared with the first quarter this year. Our customer portfolio has grown stronger as a 24% adjustment progress. Moreover, as Jay mentioned earlier, the enhancement in customer segmentation and risk assessment models enabled us to focus on high-quality customer segments and increase loan volume contribution from lower-risk borrowers. The 30-day collection rate has recovered since May from a modest decline in March and April, as the impact of the COVID hit subsided. We have been making advancements in our customer behavior analysis model to provide higher collection efficiency while simultaneously carrying on with the practice of a more spread-out collection team, to reduce the impact brought by potential regional COVID surges in the future. We're in a solid position to respond more rapidly and accurately with fewer possible obstructions. Increase in 30 plus delinquency was within the range of expectation to 4.85% versus 4.4% at the end of March. It was mainly due to the impact of COVID related circumstances in April and May and a more prudent credit policy leading to modest growth of the outstanding loan balance compared with the first quarter. But as Jay mentioned earlier, we are putting more effort and resources into existing customers, of whom we have a clearer credit performance record. To strengthen our resilience, early indicators have already demonstrated that our risk level on new loans has been lowered by over 15% as the trend expected to continue in August. We expect the 30-plus delinquency to have peaked in the second quarter. Finally, I'd like to stress that we have evolved with a more sophisticated risk management system from our experience dealing with the COVID outbreaks and economic fluctuations. We are now better prepared for any external uncertainty and complexity that should happen in the future. Thank you.

This concludes our prepared remarks. Operator, we are now ready to take questions. Thanks.

Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star then 11 on your telephone keypad and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from Yada Lee at CICC. Please go ahead.

Hello, Mr. Guo. Thank you for giving me the opportunity to ask this question. I am Diya Da from Zhongying. I am very happy to see that our company has clearly improved. We may have two small questions today that I would like to ask Mr. Guo. The first one is that we want to know how the development of the entire new consumer business in the first half of the company is going. Overall, does it meet our previous expectations? Okay, then I'll do the translation part. So the first one is about our new consumption services. And I was wondering how to view the development so far in 2022 and going forward. And could you please give us more color about the business model of Maya? And I'd like to know how much it will contribute to our total revenue in the future. And the second question is about the change of our operational data disclosure. For example, the total GMV. And I was wondering if you could elaborate more about it and what are the main drivers Thanks, management.

Let me answer the first question. Regarding the new consumption and buyout business, we have been doing well in the first half of this year. We can see that the new consumption business, especially in the branch of FinTech, we know that the consumption in China in the first half of this year is relatively low. But the entire branch of FinTech, the entire online shopping, the growth of credit-driven online shopping is still very happy. We can see that there is a significant growth compared to last year. We can see that, especially during this year's 618 period, we have a growth of 30% to 40% compared to last year. So in this area, in fact, after we carry out a whole strategic investment, we can see that it has made very obvious progress. The other one is in buying pressure. Buying pressure mainly serves the whole retail chain and brand. How to help them better through online marketing methods, including financial tools, to be able to sell their products better. That's one of the positions. What about buying pressure? In fact, it is still objectively affected by the whole control and influence of the epidemic on the offline market. But in the last few years, especially in the second quarter, we have made some more obvious progress. That is, we have adjusted our business model and launched a buying pressure app. So our entire past transactions are all dependent on the whole store to carry out offline contact. It will also increase its entire conversion rate and transaction. But now that we have bought it and pushed it out, we can not rely on the entire offline store, but can carry out a whole transaction on the buy app. So we can see that the whole of the buy pressure, the whole of the app, the whole of an online trading product is rapidly increasing, and even now it can reach nearly half of the entire transaction. It's all done in the buy app. I think this is a very important progress. Then we have another progress. That is the whole model of what we buy and sell. In the past, we were collecting fees for the business at the bottom of the line. There will be a certain whole challenge. Now we have a lot of transactions. After we started to transfer to the online buy and sell APP, we buy and sell APP. All of them are for the merchant and brand to collect fees. We have a total of about 3% of this part of the total collection fee. And the customer's desire to pay is also significantly strengthened. So I think the buyer and the brand will pay for it. The total cost of this part is about 3%. And the customer's willingness to pay is also significantly enhanced. So I think we are continuously polishing the buyer app. We can also expect that we will continue to verify this business in the future. Okay, thank you.

Let me try to translate. In the first half of this year, it was very true that we are experiencing some hindrances of the COVID, which definitely brings some pressures to our new consumption business. However, meanwhile, in the first half months, with our adjustments and strategy adjustments, we actually drive our new consumption business. quite well, and we can see that even under some pressure, our Fentula and Maya business have delivered some quarter-over-quarter, both quarter-over-quarter and year-over-year increase. Especially during the mid-year promotion of June 18th, compared with the same period last year, our performance actually increased by 30% to 40%. So with our continued investment, And in time adjustment of our strategies to this new consumption business, we definitely see our performance increase gradually. And if we have a look of our Maya offline business, we are not only providing services offline to the stores, and we actually issued and launched our to help with brand as well. In the second quarter, our Maya app, after it was launched, it was well received. And with these both offline and online capabilities, we can provide more diversified and better services to our merchant account. And we can see that after the launch of our Maya app, Over 50% of our transactions have been delivered by online. And we are also seeing that this model is well welcomed by our current customers. And we can meanwhile also see that the willingness of paying is also very encouraging. And actually we can charge a 30% take rate. And with the current progress, we are fully of confidence with our new consumption business growth in the future.

Thank you, Aiko. As mentioned in the introduction, from Q1, we divided our income into three categories to better reflect the direction of our strategy, especially the quality of our income, the higher quality of our income, and our different types of business. So, in the same way, We did a little bit of modification on the GMV record. The current GMV e-commerce record is in line with our new consumption driven business. So let me translate this myself. I think the question earlier was about the new disclosure approach towards the GMV, e-commerce GMV. And this is a reflection of our reorganization of our revenue. And this new disclosure approach reflects only our new consumption-driven LBS services. GMV and also our revenue disclosure, the adjustments are the same and the approach are the same.

Thank you. Operator, next question, please.

Certainly. Our next question comes from Alex Yee from UBS. Please go ahead, Alex.

Hello, Ms. Guan. Thank you for the question. I have two questions. The first one is about sales and marketing expense. In the first two seasons of this year, the cost of each new client is actually lower than the average level of the previous two years. there is a growth of nearly three times. The reason behind this is mainly because of the more intense market competition, or because we have narrowed the standard of discounted price. There are also other reasons, such as the investment in new consumption, which has led to this increase. I would also like to ask, if you look ahead, is the level of the cost of goods and services like this a standard or is it a short-term standard? The second question is about the quality of assets. As I mentioned, we have been doing wind control for a while. As I mentioned, we have seen some changes in the flow rate. But from what we've seen in the Vintage chart, including the DPD 30-day Vintage chart, and the FPD 30-day chart, it seems that the improvement hasn't been very obvious. It seems to be relatively stable. There may be some improvements in the second quarter, but we can't see them on the chart yet. I just want to ask, When will such an improvement in the tech rate really affect our top line? I'll translate for my question. First one is on the sales and marketing expense. So the per annum borrowed sales and marketing expense has increased quite significantly compared to the previous two years, almost at a doubling growth. So I'm wondering what are the key drivers behind, is it more due to fierce competition or due to a tightened credit approval, or is there any other more of a one-off reason? And looking ahead, what should be the kind of a normalized level we should expect? And second question is on asset quality. So the company has been focusing on quality for a while, and management has mentioned about some improvement in day one delinquency. But so far, we haven't seen much improvement from the vintage curve or your disclosed FPD every day plus delinquency chart. So I'm wondering, when could we start to see this kind of asset quality improvement starting to be reflected into your financials, including your tech rate and your top line? Thank you.

Okay, let me answer the question about customer cost. There are two main factors that increase the cost of our goods. The first factor is the economic environment and the pandemic, which led to a more conservative and efficient strategy. This will lead to a further decline in the pass rate, which will ensure the quality of the new products. This is the first factor. The second factor is that the total number of our past customers is 36. Let me take the first question in terms of the sales market acquisition call.

There are many two reasons of the increase of customer acquisition costs. The first one is definitely the macroeconomy pressure associated with the COVID resurgence. During the period, we were taking a prudent approach to control the scale and be more prudent in terms of the approval rates. so that we can further improve and manage the quality of our newly originated loan. And second, as you all know, we are adjusting our pricing from 36% to 24%, and during the process, we are in the progress of optimizing our model and RTA, and in a certain period, of the process, the acquisition cost also increased.

In the future, I would like to share some important strategies with you. Our strategy is to strengthen our ability to select customers and traffic in the future. Our RTA model is being upgraded. Recently, we can see that after the RTA is updated, it increases the efficiency of the selection of goods and costs and traffic. Our RTA model will help us to select the traffic and customers that are more in line with the demand. That is, when we operate in a sophisticated way, the traffic at the goods end will also become more sophisticated. In the future, we will achieve better progress on some of these people who are optimistic and optimistic. This can also help to reduce the cost of our entire exchange. For example, we mentioned the small town youth, the new workers in the workplace, and these small people. We can see that the competition for this part of the flow is relatively small, so its cost is relatively low.

I'd like to take an opportunity to share the trend and several approaches we are going to take and going to take in the future. First of all, we will definitely increase our capabilities of the filtration and the preservation of our customers. And we are continuously increasing our RTA model First, we can more accurately to identify our customers' quality of the behaviors. And second, through our segmentation management of our customers, we can provide better services to our high-quality customers. And as we just mentioned, that we have divided more precisely of our current customers into several such as the And comparatively speaking, these customer groups, their quality is good while the computation environment is relatively stable, so it will also help us to control the cost.

The investment of a customer Because in the supply and offline customer cost In fact, compared to the online It is still very advantageous Our Pugui's Pugui's staff Everyone can meet one or two customers So if you count it like this According to the cost of the personnel This customer cost is significantly It looks like it is lower than the online The entire investment channel to obtain The entire cost of the customer So in the future we continue to supply The entire offline team I believe it will also give us customer cost Bring a certain room for improvement The last one I would like to talk about is that in the future, we will continue to promote some non-standard flow of platform cooperation in addition to the optimization of a few advertisements on the line. Because of the non-standard flow of this kind of cooperation, its entire advertisement, this kind of collaboration advertisement, basically it will not be affected by the price increase, so it also helps us to stabilize the entire cost of the whole. So from a long-term perspective, I think the rise in the cost of goods in the short term is mainly due to some of our customer models. Some adjustments to pursue higher quality customers have led to a rise in cost in the short term. From a long-term perspective, when our model and traffic selection capabilities begin to gradually adjust to the right position, the cost of goods will drop further.

The second initiative we are taking is to leverage our offline Puhui team. Currently, each offline Puhui team employee can, on average, bring one or two customers. And if we calculate the cost per person, the cost is actually lower than the online cost. And the third, design continued optimization of our online investment. seek the opportunities to develop some non-standardized channels to access traffic. And these non-standardized or non-traditional channels to get traffic is not that much impacted by the bidding policies. Short term, the increase of our customer acquisition costs is still mainly due to our modeling adjustment to better understand customers and to pursue the high-quality customers. From the long-term perspective, after we, together with our process of optimizing our relevant model and approaches, we believe our customer acquisition costs will decline in the future.

Let me answer the second question. When it comes to our vintage curve, including the FPD30 curve, it may be I would like to emphasize that, as Jay said in his speech, from the end of Q2, including the early risk indicators in July, especially in August, the situation is all the way better than Q2. These early risk indicators show the entire performance of Vintage, including the relatively long-term performance of FPD30, it takes time. In fact, you can see the Vintage Curve, which we can see now, including FPD30, its performance has a complete performance only in May. In May, compared to the relatively serious March of our epidemic, FPD30 dropped by 10%. Compared to May, in fact, in June, compared to May, in June, because the entire performance was not completed, FPD30's decline has actually exceeded 17%. But this is not in our numbers. It is announced because it did not get the full performance. The other is Vintage. We want to get a more accurate Vintage estimate, which is at least three months and 30 plus performance. So all the performance we see now is still relatively high during our epidemic. So the optimization of the new asset quality and these relatively better risk trends may be seen in the following few Qs. OK, I'm going to translate what I just said. As Jim mentioned in his presentation, all our early indicators toward the end of the second quarter, especially in July and August, have indicated a downward trend. So basically, all the early indicators of the risk performance indicators have pointed to an improving credit quality. However, for these early indicators to translate into a longer-term, more stable indicator, it takes time. For example, what we released in our FPT30 indicator is with numbers that have full performance period only showed the performance in May. If you look at the May performance compared with March, end of March, the improvement is around 10%. But if you look at the June performance, even though the FPG-30 has not yet fully revealed, the improvement is close to 18%. So what I'm saying is for the FPG-30 indicator and the vintage loss numbers to fully reflect our recent quality improvement, it takes time. So in the next one or two quarters, you can expect to see the improvement. Thank you.

Next question, please.

That's good for me. Thank you.

Thank you. Our next question comes from Hans San at CLSA. Please go ahead, Hans.

Hi. I would like to ask a little more about the monitoring of this part. The first is the situation in terms of APR. Because as Mr. Guan mentioned, our current pricing is below 24, which is more than 80%. So our current goal is to achieve all the deposit loans at a price below 24. For our take rate, have we made any calculations? What kind of impact will this have? 对,这个是我想讲的第一个问题。那么第二个问题是关于我们断词联,还是想,因为每个记录都想跟咱们聊聊这个断词联的这个进展,因为目前看跟其他友商聊的感觉还是进展比较慢,所以想问一下我们这边的这个方案,这个计划,准备什么时候跑通,然后监管那边的反馈怎么样?对,这是我的两个问题。 So I got two questions regarding the regulation. The first one is on the APR cap. management just mentioned that the APR less than 24% already counts for more than 80%, which is good. But just wondering when are we targeting to achieve full compliance in terms of all the existing loans priced below 24%. So that's the first question. And second question is more about the decoupling of direct link. I mean, the data feeds from Leshin to the banks. The progress we learned from peers looks like it's pretty slow, so just wondering what's our plan and when do we expect to complete or at least have some kind of practice regarding the decoupling of direct link, and how is the regulator viewing our plan? That's our question. Thank you very much.

Okay, I'll answer these two questions. First of all, let me talk about the question of pricing. In the highest pricing policy of 24, in fact, we don't see any regulatory institution today that has a clear demand that all of them must be in 24. This is still due to some guidance from various financial institutions to various places. So I think we have completed 80% of the core of the entire user's entire adjustment. In fact, this has already shown that we have the ability to move the entire pricing to 24. Today, we have retained a small amount of a price of more than 24. This is also due to the needs of different financial institutions in this place to give such a small proportion. Then I want to talk about the price of 24. I think we don't have time and demand for all the time we cut. But we have the ability to do it at any time and cut it all down to 24. Let's look at the price of 24 for the influence of our tag rate. In fact, we can see that the entire tag rate of 24 users is basically the same as that of users above 24. There will be no significant difference. Why is it the same? Because its risk will be different. The risk is different. So we look at it from the perspective of our own internal pricing. The profit it has contributed to the company is also basically close. So you can see that we are in this quarter. Our average price has been very close to 24, which is a little more than 24 points. Talking about the 24 pricing policy, we'd say it's rather a guidance from government instead of requirements or law.

The different local authorities have different directions in terms of this policy, and you can see that in the second quarter, we have already had more than 80% of our pricing is within 24%, which demonstrate our capabilities to adjust our pricing further. Currently, we still keep a small amount of the business, pricing is above 24%, It's still due to some local demand. So as we just mentioned that the company is capable enough to further adjust pricing to 24% or within 24%. But currently we have no very targeted timeline of that. And in terms of the impact to the take rate, I would say there is no much difference of the performance of the above 25% and below 25%. And the impact to profit is also kind of similar. In Q2, our pricing is already very close to 24%. And in the future, we definitely have the capabilities to further adjust it to 100%. But currently, we have no timeline for that.

Let's talk about the issue of short-term contracts. First of all, I would like to emphasize that our entire progress is still very fast, and it is not slower than other traders in the market. This is the first piece of news we have learned. The second piece of news is that We can provide a full-fledged cross-border cooperation with the market. Basically, there are only two institutions. As you all know, we have actually reached a full cooperation with Yijia. We have already developed all the solutions. We are ready to go on the line at any time. But this is in the 14th article of the whole supervision this year. He delayed the whole cross-border thing for another year. In fact, this is actually a very important piece of good news for us. Let's take a look at this matter. It is believed that the past emphasis on the diamond chain, in fact, the whole program is under supervision and approval of supervision. The program has not yet come out. It's all about each family doing their own program. According to the words of the diamond chain, how do you understand it? That is, there is no clear rule to tell you how to do it. So the plan we are doing today, including the plan we see on the market, is not a plan that is really approved by the supervisor or approved by the supervisor. So if it is delayed by one year in the future under such circumstances, it actually means that the supervisor is re-examining this matter. Because this thing will definitely affect the whole of China, especially the whole of China's small and medium banks. It will have a great impact. What about the restructuring? He gave the supervisor more time to think about how to turn the paper. It has little impact on the market and on the economy. Especially in China's current economic situation, banks need more bonds to be released. So I think that in terms of turning the table, I think the future should be in a better direction. Of course, we have not given up our enthusiasm. We are actively connecting with the two companies in the market to design some solutions. We will also invest in R&D resources to make some preparations at any time.

The regulations in terms of the disconnection, I want to emphasize that our progress is actually very fast and in pace. It's not slower than our peer companies in the industry. And to be honest, as everybody knows, there are two partners or bureaus can provide relevant cooperation with us. We actually already have cooperation with them and have a different plan ready to connect it. if the official requirement is issued. However, if we have looked off the recent issue, the 14 documents by the authorities, actually the discussion, this connection policy is actually being extended for more than one year. And we actually interpret this policy as a positive signal. To be honest, currently there is no official requirements or instructions have been issued by the authorities. We believe that the authorities and the relevant government bureaus are also considering these kind of requirements seriously and considering the impact to the players in the industry, especially the medium and small banks, as well as the impact to the economies. of China, especially during such a special period. However, as I just mentioned, we integrate this policy from a positive perspective and we are fully prepared to cooperate with the partners in the future. And our current plans and policies are actually ready in place. to go if the specific requirement is issued.

Thank you. That's all the time we have for questions today. I will hand back to management for closing comments. Thank you.

Thanks again, everyone, for joining us today. If you have further questions, please contact us. We'll have our contact information available some other time.

Thank you. This concludes the call today. Thank you all for joining. You may now disconnect.