LexinFintech Holdings Ltd.

Good day and thank you for standing by. Welcome to ListenFintech first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. And I'd like to hand the conference over to Ms. Jamie Wang, IR Manager. Please go ahead, ma'am.

Thank you. Hello, everyone. Welcome to Los Angeles First Quarter's 2023 Earnings Conference Call. With us today on the line today are CEO Jay Hsiao, President Jarrett Wu, and CFO James Jones. Before we get started, I'd like to remind you that the call and presentation containing business outlook and forward-looking statements, which are based on assumptions as of today. The actual results might differ materially, and we undertake no obligation to update any forward-looking statements. Jay will first provide an update on our overall performance. James will cover the financial results in more detail. And lastly, Jared will then discuss risk management. I'll now turn the call over to Jay. His remarks will be in Chinese, and the English translation will follow. Stay pleased.

Good morning and evening everyone. It's my pleasure to speak with all of you again.

In the first quarter, with the gradual recovery of consumption post-pandemic and the continued improvement of the overall macro environment, consumer finance started its moderate growth. As we've maintained growth through a two-wheel drive strategy, with upgrading and data-driven optimization, we achieved another quarter of strong results.

The turnover amount is 60.9 billion, compared to the growth of 41%. The management revenue amount is 1,070 billion, compared to the growth of 28%. 60.9 billion RMB in local region nation's volume, up 41%.

year-over-year. Total outstanding balance at 107 billion RMB up 28.0% year-over-year. Revenue at 2,980 million RMB up 74.0% year-over-year. Net profit of 327 million RMB, an increase of 302.0% year-over-year. As demonstrated by the first quarter results, our profitability has continued to improve. with net profit margin rising to 11.0% from 4.8% in the first quarter of last year, and has grown steadily for the fourth consecutive quarter, and various operating indicators are moving in a positive direction.

To be more specific, there are three highlights of the first quarter's performance. First, we are strengthening the customer recognition, while accelerating the clear tail of assets. The asset data has been improved. Second, we are continuously optimizing operations.

Let me elaborate in more detail. There were three major operational highlights in the first quarter. First, as we enhanced our user risk assessment capabilities, we accelerated our pace in reducing high-risk user segments and therefore improved the overall asset quality. Second, we continued to refine operations and further optimize operational efficiency. Third, we have been implementing cost-efficiency initiatives. As a result, our profitability has been steadily rebounding.

First, in terms of asset quality, we have increased the construction of the wind control system capability. The focus is on the operation of high-quality old customers and gradually eliminating high-risk users. We have added an upgraded user risk recognition tool, the RR integrated model. Through multi-dimensional risk combination comprehensive evaluation, First, in terms of asset quality, we further pushed ahead on overhauling our risk management system.

focused on maintenance and operation of high-quality existing customers, and gradually eliminated more high-risk users. We have iterated and upgraded the user assessment system, the risk-rending model, which automatically integrates a variety of risk models, along with the combination of multidimensional risk factors, into an overall user risk assessment scheme. These upgrades help us to conduct more comprehensive risk assessments and therefore make more accurate decisions on users. After being put into use, the new loan volume in the first quarter contributed by Prime users increased to 88.0% from 77.0% a year ago. Secondly, in terms of detailed operation, we have upgraded the marketing system.

Based on the standard system and customer desire, marketing preference, response, and offer satisfaction, more than 10 models have been carefully disassembled, effectively detecting customer needs, and increasing offer satisfaction. For some segmented people, after the model is applied, the operating profit increases by up to 70%. Based on this, a few key strategies have been completed. Through the marketing platform, the marketing strategy has been lowered, and the user activity has been greatly improved. Under the new modernization operating system, the first quarter's electricity consumption capacity has been significantly improved. The first quarter's electricity consumption has been reduced by 92% compared to the current level, and the cost has been greatly reduced. The first quarter's electricity consumption Second, in terms of operational optimization, we upgraded our marketing system and segmented our user into more detailed and various categories. Based on the underlying customer tagging system

and over 10 evaluation models of users' borrowing willingness, marketing preferences, responsiveness, offer set expression, and etc. For some certain customer groups, the application of this new detailed separation of user segment model pushed up the operating profit of that specific customer group by 70.0%. On this basis, we sorted out a marketing strategy decision tree structure and launched marketing strategies accordingly. which significantly boosted users' activities. Under this new optimized operational system, in the first quarter, our telemarketing capabilities have been significantly strengthened, and the loan volume contributed by the telemarketing channel grew by 92.0% sequentially. At the same time, the cost significantly decreased in the quarter, with telemarketing cost per sale fell 49% year over year, we expected to save 23.0% of the original annual telemarketing cost. In front of reactivating paid-off customers, the conversion rate increased 15.0% quarter-over-quarter. Loan volume from those converted customers grew 15.0% quarter-over-quarter. Additionally, these results were achieved with half of the marketing cost.

Third, in terms of profit, the capital effect continues to increase. Funding costs continue to drop, and profit capacity continues to increase.

Third, we have enhanced our profitability attributing to our continuous efforts in cost optimization initiatives and a further reduction in financing costs.

In the first quarter of 2003, G&A expenses stood at $97 million, a 17.0% decrease from a year ago. This is a clear indication of our improved operational efficiency. Funding costs further dropped to 6.6%, which is 0.2% lower than last quarter and 1.6% lower than a year ago.

It's worth noting that this is a historic low of funding costs during the past three years. In April, we successfully resumed our annual financial partners conference, which got suspended during the three-year pandemic period. In the conference, we were very honored to have over 100 financial institutional partners with whom we will surely strengthen our business cooperation in the future.

Lexin has always insisted on technology and research and development. Using technology to drive development. In the first quarter, research and development reached 1.3 billion yuan.

We remain committed to investments in research and development as we firmly believe in technology is the core engine of our business growth. In the first quarter of 2023, research and development investment reached $130 million, maintaining one of the highest technology input levels amongst our peers.

On the data front, we have put tremendous effort in data mining and analysis of our entire data

Accordingly, we're able to find links and correlations amongst various data sets. And links between low-level fundamental data sets and business models are a solid foundation of launching data-driven and intelligent decision-making approach. Furthermore, we developed simulation predicting model, attribution model of abnormalities, A-B testing platform, and et cetera. all of which empowers management to steer business in a more data-driven and intelligent manner.

Lexin has been actively exploring and using new technologies to improve our work efficiency and customer experience. Remember, we have accelerated the application of AI big models in Lexin's business, including in the development of code assistance, design, creative production, e-commerce, and customer automation services. We have already landed and achieved significant efficiency improvements. We have been continuously exploring the utilization of new technologies in optimizing operation efficiency and users' experience.

In the first quarter of 2023, we expanded the application of our AI large language model in our business at a faster pace. We saw a noticeable improvement in efficiency among the application areas, including coding assistant tools, initiatives of design, telemarketing, and smart customer services. For example, the application of this AI model in our telemarketing scenario pushed a credit line approval rate by 70% versus the technology service supplied by vendors, and also boosted order placing rate on the exact day that borrowers are granted with credit line by 10%. Looking ahead, we'll also comprehensively apply the model to the areas of risk management, anti-fraud, and et cetera.

In addition, we further enhanced our existing unique Lexin ecosystem. First, e-commerce business reached 1.13 billion GMV, an increase of 69.0% from last year. Cumulative customers grew by 71.0% compared to last year.

the robust growth of GMB and users in e-commerce business effectively fuel the engine of Luxin consumption ecosystem.

Second,

The technology impairment SaaS business achieved tangible progress, therefore won the recognition from various financial partners, including local commercial banks with AUM over trillion RMB, regional, urban, and rural banks. The technology impairment service facilitates our cooperation with financial partners and deepens our business relations.

In terms of stock exchange business, we have accumulated a lot of experience and advantages through the offline direct goods model. Third, we plan to expand our offline sales team and leverage our expertise in direct sales channels in light of the gradual recovery of China's economic activity.

Our offline acquisition channels bring more first-hand user information, hence more accurate credit assessment, and eventually creating a unique competitive advantage.

The reason why we achieved good results in the first quarter is mainly due to our continuous improvement of customer identification, the continuous improvement of the asset quality and customer group quality, and the continuous and detailed operation of door-to-door verification, The second quarter will be a long-term process due to the recovery of the macroeconomic and consumer economy. We will continue to maintain a prosperous business and adhere to the priority of asset quality. The expected second quarter trading volume will be 6.3 billion to 6.35 billion yuan, including growth of 28% to 29%.

The strong results in the first quarter were mainly attributable to our risk management capabilities upgrading in customer risk assessment and therefore the improvement in customer and asset quality. It is also due to our continued refining of operations and cost reduction initiatives. As for the second quarter, we understand that economic recovery and resuming consumption is a long process. We will continue to undertake a more proven approach Based on our preliminary estimations, loan volume in the second quarter is expected to reach 63 to 63.5 billion RMB, a 28% to 29% growth year over year. Next, I'll hand over the call to our CFO, James, to share more detailed financials. Thank you.

Thank you, Jane. I will now provide more details on our financial results. Please note that all numbers are in RMB unless otherwise stated. In the first quarter, we continued our fourth consecutive quarters of recovery, both in our overall business and in our financial numbers. We expected this trajectory of turnaround to continue in light of the rebound of China's economy and our dedicated efforts in optimizing operations. The strong performance in the first quarter was a result of the management's continuous efforts in overhauling our risk management, focusing on better quality user segments, upgrading our technology and operational capabilities, as well as our new cost restructuring initiatives. First, please let me explain at a high level what happened in the quarter as compared with the same quarter of 2022. The loan originations for the quarter reached $60.9 billion, an increase of 41% year-over-year, beating Q1 guidance we gave earlier. Revenue grew by 74.2% year-over-year to reach around $3.0 billion for the quarter, which was mainly determined by the GMB growth and an increased loan balance, which reached $107 billion. The weighted average APR stood at approximately a little over 24% for the fifth quarter, close to around 1% points lower than a year ago. Loans with APR under 24% now make up more than 80% of all loans. Partially offsetting the negative impact from the lowered APRs on our loans was a decrease in our cost of funding from 8.2% a year ago to 6.6% in Q1. It's worth noting that this is a historical low of funding cost during the past three years. Loan tenors increased to 15.1 months versus 12.3 months a year ago. As we emphasized last quarter, overhauling risk management remains our top strategy for the year. We continue to focus on upgrading to better credit user segments and rebuilding the risk team, the systems, and the process, and the infrastructure. Gerrit will elaborate more on this shortly. The improved results from our efforts can be partially seen in our 30-day plus delinquency rate, which improved to 4.57% in the first quarter as compared to 4.62% in the fourth quarter of last year. The 90-day plus disincreasing rate stood at 2.53%, basically remaining stable as compared to the previous quarter. This was due to 90-day plus disincreasing rate metric is a more lagging indicator than 30-day plus metric. In Q1, we have been pushing ahead a series of cost restructuring initiatives that we launched last year. We have seen some further improvements to operating expenses. Total operating related costs and expenses, including processing and serving costs, sales and marketing, R&D, and G&A, as a percentage of average loan balance stood at 1.16% versus 1.28% in Q1 of last year. This cost optimization happened despite of a slight pickup of sales marketing expenses, while G&A, R&D, and processing and servicing costs all came down. We will remain committed to undertaking these cost restructuring initiatives and expect our efforts to bear more fruit in the long run. As a result of the affirmation, we are able to report net income of $327 million, an increase of 302% year over year. The net margin improved to 11% versus 4.8% in Q1 last year. This clearly presents a steady upward trajectory of our operation result, with each quarter improving over a year ago. Apart from the above year-over-year analysis, I would also like to elaborate a little bit more on the progress achieved through quarterly comparisons. Total GMB was $60.9 billion, an increase of 8.7% quarter-over-quarter, as we grew the business with prudent approach and put risk management as a top priority. In the first quarter, we saw the GMB on our e-commerce platform came down slightly from boosted high level during single day shopping festival in Q4 last year. If we carve out the revenue from e-commerce business, total Q1 revenue grew by 4.5% quarter over quarter. Considering impact of e-commerce business seasonality, total revenue for the whole group stayed at about $3 billion, almost flat on quarter-over-quarter basis. Take rate fell slightly to 2.5% from 2.6% last quarter. The minor fluctuation in take rate is a blended result of the more booking of provision due to longer tenor loans and the continuous improvement in asset quality and the reduction in funding costs. Operating expenses stayed almost flat by a minor 1.6% increase quarter-over-quarter, attributing to pickup of sales and marketing-related costs in user growth. As a result of affirmation, we achieved a sequential growth in the net income of 8.7% and a boosted net margin to 11% from 9.9% in last quarter. To summarize, We have delivered a noticeable improvement during the first quarter from both a year-over-year and a quarter-over-quarter perspective. This marks the fourth consecutive quarter of V-shaped recovery, both in top line and bottom line, since we hit the lowest point of operational results in Q1 last year. As we mentioned last quarter, although we are fully aware we have a long way ahead in our turnaround, the year of 2023 unfolds with a good start, indicating we are well on track. Next, let's take a detailed look at the financials. As mentioned, our total operating revenue for the first quarter was $3 billion. representing a decrease of 2.2% quarter-over-quarter due to seasonality of e-commerce business, and an increase of 74.2% year-over-year, mainly driven by the credit facilitation services and the e-commerce business. Revenue from credit facilitation service was approximately $2.1 billion, representing a 7.8% increase quarter-over-quarter and a 136% increase year-over-year. which is driven by the GMB growth. Revenue from tech empowerment service was $368 million representing 10.9% decrease quarter over quarter and a 26% decrease year over year, which was primarily due to the change of product mix among various tech empowerment services. Revenue from installment e-commerce platform service was $499 million, representing a decrease of 25.9% from the last quarter and an increase of 56.6% year-over-year, which is due to the seasonality of e-commerce business. Moving on to the expense side of the quarter, sales and marketing expense increased by 4% quarter-over-quarter, which was mainly due to our stepped-up investment in acquiring better quality users. Our goal is to upgrade to better quality customer groups and obtain higher LTV. While we're taking a prudent new acquisition strategy now, we will keep on closely monitoring macro data as China's economy is gradually recovering and it sees the growth opportunity when the right timing comes. Research and development expenses decreased by 4.4%. 5% quarter-over-quarter and a decrease 15.1% year-over-year to $129 million due to efficiency. G&A expense stayed almost flat on a quarterly basis and a decrease of 17% year-over-year to $97 million. It's a noticeable cost efficiency for each achievement that a G&A expense remained at almost the same level on a quarter-over-quarter basis while our top-line GMB maintained an upward momentum due to a series of cost initiatives. Going forward, we plan to step up efforts in this regard. Net profit was approximately $327 million in the first quarter, a 8.7% increase quarter-over-quarter, and a 302% increase year-over-year, which beats high end of our initial expectations. At the end of the first quarter, the company had a cash position of around $6.5 billion on hand and a net equity position of $9 billion. Finally, I would like to discuss our outlook for the second quarter of 2023. As we know, economic and consumption recovery usually will take time, as evidenced by the ongoing current quarter's modest growth. Therefore, we remain cautious and are monitoring closely on the overall macro and consumption outlook. Based on the company's preliminary assessment of the current market conditions, total loan originations for the second quarter of 2023 are expected to be around $63 to $63.5 billion, representing an increase of 28 to 29% on a year-over-year basis. These estimates reflect the company's current expectation, which is subject to change. The strong results of first quarter demonstrate clearly that our turnaround is well underway. In the long run, our dedicated efforts in risk management, cost initiatives, as well as new user acquisitions will establish solid foundations for our long-term goal of sustainable growth. With that, I would like to turn the call over to our president, Jared Wu, who will discuss our risk management.

Jared, please go ahead.

Thank you, James. Good morning and good evening, everyone. It's my pleasure to speak with all of you again.

I would like to introduce the company's progress in risk management. Since the beginning of this year, Hong Kong's overall economy has gradually recovered. On the public side, we continue to carry out unwavering action to hand over wind control as the primary task of the strategic layout. We continue to continue the relatively stable wind control strategy and the cautious HOK strategy. At the same time, we continue to increase the cleanliness of the high-quality customer experience. In the first quarter, the tax rate index continues to drop. The quality of the assets continues to improve. By the end of the quarter, our expected rate of more than 30 days compared to the previous quarter has improved to 4.57%. Five points have dropped compared to the previous quarter. Next, I'd like to elaborate a bit more regarding our risk management measures and improvements for the past quarter.

Ever since the beginning of the year 2023, we saw a gradual recovery of China's economy. Accordingly, at the company level, we continue to implement our unwavering focus on risk management and the continuation of a prudent risk management and customer acquisition approach. In addition, we have been allocating more resources and putting more effort to better serve and favor our client customers. In terms of our risk modeling, we have been continuously iterating our core values and enhancing our user risk assessment capabilities. In the first quarter of 2023, the day one delinquency continued to drop and overall asset quality got improved, with 30 plus day delinquency down 5 bps quarter over quarter at 4.57% and 90 plus day delinquency being the more lagged indicator standing unchanged sequentially at 2.53% as of the end of the first quarter. Currently, as business and daily life of people continue to normalize and consumer confidence being gradually restored, we will continue to hold risk management as one of the top priorities in business operations, and we expect the overall asset quality to continue to maintain a positive upward momentum.

The goal of increasing the quality of our customers is still our most important goal. We will continue to work on this goal in this quarter, including the following. First, we will continue to increase the risk management system, increase the accuracy and overall efficiency of risk management, further dilute the customer group and increase the risk recognition degree of the customer, and at the same time continue to promote high-risk customers and optimize the asset structure. We focus on the coverage of real-estate data and strengthen the deep digging and application of real-estate data. At the same time, we continue to introduce more regular data sources. Combining the digging and expansion of internal behavior data to ensure that we can further divide the customer group and refine the recognition and risk. Third, we continue to carry on upgrading the model of user division of different customer groups. There is also a continuous improvement in the recognition ability of customers. This is the most important support for us to continue to improve the best customer ratio. It will also be one of the most important projects we continue to invest in.

In the first quarter, increasing the proportion of prime customers remains our most crucial objective. Thus, we continue to work on upgrading our risk management system, including the following key initiatives. First, we continue to iterate and upgrade our risk management system under the business strategy of risk-driving operations. It improves the granularity and the overall efficiency of risk management, further refining our customer segments and increasing the depth and width of our user identification capabilities, while continuing to review high-risk customers and optimize our asset structure. Second, we put heavy emphasis on investing in the coverage of PBOC credit data and strengthen the utilization of credit data. In the meantime, we continue to introduce more compliant data sources combined with the thorough usage of internal consumption behavioral data to ensure that we can identify customer credit profile more accurately by further refined customer segmentation accordingly. Third, We continue to iterate and upgrade model matrix for different customer segments. And our ability to assess customer credit profile has also got further improved, which is the most essential pillar for us to increase the proportion of client customers and will be one of the most key projects in which we continue to invest. We believe that in the remainder of 2023, We will make more breakthroughs in our user identification capability. 2023 is the year of economic recovery in China. We are committed to upgrading our core risk management capabilities and accelerating the strengthening of our refined risk management systems. As Jay and James mentioned earlier, we maintain a cautious view of the macroeconomic environment, adhering to the principle of risk-driven, monitor the market externally, and build capacity internally. Above all, we firmly believe that with a diverse vision in mind and a solid infrastructure, we can continuously generate sustainable long-term returns for all shareholders. Thank you. This concludes our prepared remarks. Operator, we're now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Once again, that's star 11 for questions. Our first question comes from the line of Frank Chin from Credit Suisse. Please ask your question, Frank.

Thank you, management, for taking my questions. This is Frank from Credit Suisse. My first question is regarding the supply and demand dynamics most recently. In the first quarter and second quarter today, how would you describe the recovery of credit demand? And on the supply side, is there any change in terms of risk appetite? On the other hand, could the management provide some more color on the strategic or operational focus for the rest of the year? Thank you very much.

Let me answer this question. First of all, let's look at the supply and demand situation of the entire market. In fact, you can see our performance in the first quarter. In the first quarter, we actually have a certain degree of rebound, right? And in fact, you can see this rebound in the first quarter. I think it comes from two important factors. The first factor is that after the epidemic is released, the consumption will be released. Secondly, it comes from the improvement of our own optimization of our own optimization of our own optimization of our own optimization of our own optimization of our own optimization of our own optimization of our own optimization of our own optimization of our own optimization of our own optimization of our own optimization of our own optimization of our own China China China China China China From the point of view of the entire demand section, it is a little slower, but it is still on a path of growth. This is the current situation of the entire demand side. I think in the demand section, we actually have an extra different place for ourselves. That is, we have business, we have e-commerce, we have a consumer scene. In fact, we can be in the entire borrowing demand is not so strong and the user has just needed the situation In fact, we can use the marketing method of e-commerce to attract more users to consume through the discount of goods, in order to reach an entire 4G user and carry out an entire process that requires such a process. So I think in the second quarter, in fact, you see, we are preparing 618 recently. I think 618 is another good opportunity to stimulate more users to generate demand. So I think this is also a unique place. Let's look at it from the perspective of funds. I think there is still plenty of funding available. Because the total amount of assets that the national fund can actually invest today is relatively limited. After 10 years, we have still received the recognition of financial institutions. In the last quarter, we also held a joint partner meeting. We invited more than 100 financial institutions to the scene. In terms of demand side, as you can see from our first quarter's results,

Our overall loan volume have increased and we actually saw the rebound of the overall demand in the first quarter. It was mainly attributed by a couple of factors. The first one with the COVID and the lockdown quarantine being over, there was a spike in consumption needs and also the overall poverty. Second, it was mainly due to our refined operations. as well as the capabilities in risk assessment being increased, we were able to better recognize customers to better serve the right customers and the good existing customers. This is that most of you already knew that we have a very large existing customer pool. With our improved risk assessment capabilities, we are able to better pick them out and better explore their value from the existing customers. And as of right now, in the second quarter of 2023, as we can see the data right now, the trend is still stable. But after spring break spiked past, the demand has been slowing down a little bit. But the trend of increasing is still remaining relatively strong. And in that sense, we also have different products. We have our own ecosystem. We have the e-commerce, a very special consumption scenario. When the lending need is relatively not as strong as the previous quarter, we have another option to create demand, which is the discount on products to attract our customers, whether it's new, whether it's the existing one, to make consumptions and to create demand. So the second quarter, as of right now, we are preparing the 618 Festival, which would be a great opportunity to generate more demand, thanks to our unique ecosystem. When it comes to the funding cost side, I'd say the supply is still relatively strong and sufficient right now. Based on the current national situation right now from our funding partners, they have limited options to really invest in. And after 10 years, our risk level and our capabilities in risk management are recognized and approved by them. And also, as you might know already, we had this cooperation conference day with our funding partners and all of them showed the willingness to make the cooperation deeper. And also, as you can see, our funding costs actually lowered in the first quarter, and the overall supply is still relatively strong. I hope that answers your question, Frank. Thank you.

In terms of the focus of this year's work, we will continue to do our best this year. I think first of all, we need to improve our risk management capabilities. We need to adjust our entire asset structure to reduce the risk. In terms of risk, we are preparing a risk 2.0 system for Xenomi. After this system is launched, we will get an improvement in the recognition and risk management capabilities of the entire user. So we will gradually start to adjust and operate this system. I believe that after this is launched, our entire risk management capacity will be on another level. The other one is that we will continue to push back some of our high-risk customers. I think it will establish a standardized whole set of mechanisms and systems to push back high-risk customers. Secondly, I want to say that we still need to continue to build up the ability of our entire X1-based customers. I think Lexin itself has the advantage of having a scene and a store with a store floor. And we also have the advantage of the whole team. So we will strengthen our advantages in this regard to build up the ability of our X1-based customers. The third is that we will continue to refine the operation to improve the LTV of the user, to improve the efficiency of our entire operation. The fourth is to continue to do the work of our jamming effect. The work of the jamming effect is still relatively obvious. We see that our entire operation, sales, research and management costs, and the overall balance of debt and debt balance, from 1.28 to 1.16 a year ago, In terms of our key strategies, there are four main ones. The first one is the risk management capability upgrading. We have been undergoing certain strategies to upgrade our asset structure and to increase

to lower risk level. We are preparing the risk management 2.0 system, and when it's ready, we will get the upgrade in capabilities in risk management. Hence, we are actually doing it step by step to adjust and to operate. When it's ready, our capabilities in risk management and identifying in user risk will be significantly upgraded. And also, we continue to do the elimination of high-risk users, and we are in the progress of making it a common operational thing to do the routine elimination of the high-risk users. Secondly, we'll try to continue to differentiate ourselves from others in customer acquisition. Like I said earlier, we have different scenarios, like e-commerce scenario, and we have a very strong offline team. These are the advantages that will help us to strengthen our own capabilities. And third, we'll continue to do the refined operations to further increase the customer's LTV as well as the operational efficiency. Fourth is we'll continue to go through, undergo the cost efficiency initiative. As you can see, in the first quarter, it shows some prominent results. The percentage of our operational costs as over the outstanding loan balance actually decreased, and our net margin increased to 11%. And for the rest of the year, we aim to continue to increase our own profitability. That answers your question, Frank.

Right. Thank you. Our next question comes from the line of Alex Yeh from UBS. Please go ahead, Alex.

Good morning, Mr. Guan. My first question is that in the second quarter, in April and May, we saw the amount of loans in the month. Can you share with us the situation and the trend? And how is the current share compared to our previous expectations? The second question is about asset quality. Can you share with us some more promising asset quality indicators? Is the situation in April and May continuing to improve? Thank you. So I'll translate for my question. First is on the low volume run rate in April and May. Could you share with us how has the sequential movement been so far? And how does the growth you have seen now compare to your previous expectation? Second question is on your asset quality trend. Could you share with us some of the early asset quality indicators, the trend in April and May? And do we expect further improvement from here?

Thank you. Because our second quarter, in fact, the entire transaction amount we gave is expected to be around 6.3 to 6.35 billion. I think this is our estimate for the second quarter. But I can talk about the figures for the first quarter. In fact, compared to January, the figure for February is 8%, for March it is 2%, and for April it is still 2%. So in terms of the overall government, So as you heard already, for the second course, our guidance for the loan volume was

63 to 63.5 billion. But I could share some month over month in the first quarter results with you. The numbers of application-wise, there was a minor peak in volume after the Chinese New Year. In the month of February, it showed a 8.0% increase quarter over quarter. For the month of March, it showed 2% month over month. And as of now, May, we are seeing a minor decrease in the amount month over month as the COVID passed and the spike kind of slowed down a little bit. We're seeing a little bit slow down in demanding, a bit entering the second quarter, but it's still in line with our management team's expectation.

In terms of risk, I think that is to say, we see that in the first quarter, our overall risk is actually not bad, and then we maintain a stable price. In fact, in the second quarter, from some early indicators, we can see that the entire indicator is still stable. Another observation point is that the structure of our new assets is better. The entire asset we add every month, whether it is 1 to 3, it is still rising. The ratio of 6 to 8 continues to decline. So I think from the structure of the entire new asset, it is actually a better structure. So we believe that with the continuous improvement of the new assets every month, we still have room for improvement in the future. We should continue to improve.

Okay, in terms of risk, we're seeing the first quarter's risk being stable, stable and decreased. And for the second quarter, as of right now, certain early indicators is stable right now. But from the new loan perspective, the structure, the overall structure is actually better. What if the RR123, the percentage of RR123 being increased, the RR628 percentage being decreased from the new loan perspective, they are overall better. And with the monthly new loan structure being continually improved, our overall risk level will be improved in the future. And there are still some optimizers in rooms when it comes to the overall risk level.

Hope that answers your question, Alex.

Right, thank you. Our next question comes from the line of Yada Li from CICC. Please go ahead, Yada.

Thank you for this opportunity. I'm Li Yada from CICC. Today, I would like to ask two questions to the management team. The first question is about the choice of the housing model in the future. I would like to ask about the balance of the proportion of light and heavy assets in the future, as well as the prospect of the model stand-by, and whether we will increase the scale of the payment in the table in the future. The second question is whether the management team can share in detail about the progress of our branch business and other new consumer businesses or products, as well as the prospect of the future. Thank you very much. Then I'll do my translation. Hello, management. This is Yada from CICC. And my first question is regarding the choice of the lending model. And could you please give us more color on the trend of the credit facilitation and the risk sharing model or tech empowerment services in the future? And will there be any plans to increase the on-balance facilitation? Secondly, I was wondering about the recent updates and outlook of Fenqi Le and other new consumption business. That's all. Thank you.

So I will take a crack at the first part of the question, and Jay will answer the second part of your question. The first part of the question is related to risk-taking and profitability. Obviously, at the company level, we always try to achieve the balance. Obviously, it makes sense that if risk improves, then I want to do a little bit more so that I increase the profitability. If somehow the risk is worsening, obviously I don't want to do more, right? I want to do less so that I can retain my profitability. So that has been our kind of attitude. Resulted out of this basically is reflected here in terms of the proportion of the business where we take risks, that is in the loan facilitation business and in rev share business reflected in our tech empowerment part of the business. Right now, the rev-share business, basically, we don't take much risks in this part. It accounts for roughly 26% or so. And in the last year, several quarters, has been hovering between, say, 20% to 30% or so. So we are watching very closely of the overall macroeconomic data and our overall risk indicators. If the overall macro data continue to improve, and our asset quality continues to improve. Obviously, the overall credit situation is improving, then it doesn't preclude us from really taking a bit more risks so that we increase the overall profitability for the company. So basically, that's our kind of thinking, if you will, to run the business. Now, Jay, for the second part of the question.

Okay. We know that Lexin is a unique place for us, that is, our entire business. The advantage of the environment and the scene So in the field of e-commerce In fact, we see that In fact, our entire growth is relatively strong Especially in a country like this E-commerce is still a relatively intense competition In this case, we are in the first quarter We can grow by 69% Our trading users grow by 71% Revenue grows by 57% In fact, it is not only faster than our big companies I think it will grow faster than the entire industry In fact, this is the unique part of our e-commerce, that is, we are a credit-driven entire consumer e-commerce. So the people we serve, in fact, everyone still has credit consumption needs. I think in fact, in the entire domestic environment, especially in the case of large platforms, where everyone's demand for interest is getting higher and higher, in fact, it gives our e-commerce a more unique operating space. Then I want to say that this is the first point. The second point is that e-commerce is actually in our entire ecosystem. In the future, it will be in the management of our entire customers as well as the delivery and storage of customers. It still has a very strong joint effect with our housing and consumer finance business. So I believe that in the future, you can see that we will have more progress in this regard. The other one is that in our entire ecosystem, I want to talk about this business of our general meeting. We will not rely mainly on the offline BG to do business offline. With the recovery of the whole economy, I think in the offline team, their entire customer, from the cost of the customer to the entire risk of the entire customer, we can all see that it still has a certain overall advantage, right? Today, the entire online traffic is actually a more and more scarce resource, and it is getting more and more expensive. In fact, offline, It can help us to evaluate each customer better and more comprehensively. It can be more precise to identify each user's entire desire and ability to repay. Compared to the entire online model, especially in this era of pure competition, I think we can better understand customers and provide better products to customers, which will be a relatively good advantage. So in the long run, I don't think we will gradually start to increase the investment in this area to form a more diversified entire customer and business ability. Yes, I think the other one is to talk about our entire financial technology business. Financial technology business, it is actually the standardized and business ability that we have accumulated over the past ten years. So we now have five or six companies that have achieved better cooperation with financial institutions and have reached a certain scale. So we can see that in fact, In this respect, to some extent, it is a currency-based process that is similar to the energy of the past. On the other hand, the service we provide to the banks can strengthen the relationship between the funders and our entire cooperation to deepen the cooperation. So we now see that some banks that cooperate with us, they give us a capital cost that is actually lower than our average today. So I think this So as you know, we have our own Lushin ecosystem.

E-commerce-wise, the overall increase has been very strong, especially with other e-commerce peers or others in the industry being in the very heavy competition. As I shared already, in the first quarter, not only the volume in GMB increased year over year, but also the revenue, as well as the cumulative trading customers. They are only larger than our main business or other businesses within the company. exponentially actually larger than the overall increased speed in the industry. So the customers that we serve in our e-commerce areas are mostly customers with actually credit consumption needs. Under the current situation right now, the overall macro economy and environment, with ATR requirements being a little bit higher, the requirements being a little bit higher, actually give the e-commerce sector a bit more opportunity to increase and expand a little. Furthermore, e-commerce could actually help us with the customer acquisition and as well as the customer retention with our main business, which is the loan facilitation business in the future. Next is our offline Puhui team. Our offline Puhui team mainly relies on the offline BD operations, with right now the economy being resumed, being in recovery. The team actually helps with customer acquisition costs and as well as risk level. we can see there are a lot of advantages comparatively. When the online traffic being more expensive as well as being more rare, the offline Fuhui team helped us to evaluate customers more accurately as well as gave us the capability to understand their willingness as well as to keep them in retention. Especially with the existing customers competitions, we get to know them better via Puhui team, and we will continue to increase the investment on our offline Puhui team to help us to differentiate when it comes to customer acquisition front to better acquire better customers. And another business I'd like to mention is our tech empowerment SaaS business. It's pretty much a accumulated experience of 10 years of standardized capabilities. We already got into cooperation with a relative sizable volume with five or five to six of our banking partners and our funding partners. It's pretty much a monetization of our past experience. We use our experiences and capabilities to help them, and in return, they strengthen the cooperation in our main business, helping us with a relatively lower funding cost than the current average funding cost. So I think this is a very unique system Belushi has. We believe the cooperation between aforementioned business will be strengthened and will be more interrelatable in the future to help us to differentiate ourselves amongst our peers.

Hope that answers your question, Yara. Thank you. I'm sure you know further questions. I'd now like to turn the conference back to the management team for closing remarks.

Thank you again everyone for joining us. If you have further questions, please contact us via our contact information available on our IR website. Thank you.

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect. Music Playing Music. Thank you. Thank you. Bye. you Thank you. Good day and thank you for standing by. Welcome to Listen FinTech first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. And I'd like to hand the conference over to Ms. Jamie Wang, IR Manager. Please go ahead, ma'am.

Thank you. Hello, everyone. Welcome to Los Angeles First Quarter's 2023 Earnings Conference Call. With us today on the line today are CEO Jay Hsiao, President Jared Wu, and CFO James Jones. Before we get started, I'd like to remind you that the call and presentation containing business outlook and forward-looking statements, which are based on assumptions as of today. The actual results might differ materially, and we undertake no obligation to update any forward-looking statements. Jay will first provide an update on our overall performance. James will cover the financial results in more detail. And lastly, Jared will then discuss risk management. I'll now turn the call over to Jay. His remarks will be in Chinese, and the English translation will follow. Stay pleased.

Good morning and evening everyone. It's my pleasure to speak with all of you again.

In the first quarter, with the gradual recovery of consumption post-pandemic and the continued improvement of the overall macro environment, consumer finance started its moderate growth. As we've maintained growth through a two-wheel drive strategy, risk upgrading and data-driven optimization, we achieved another quarter of strong results.

The sales volume is 60.9 billion, compared to the growth of 41%. The management revenue is 1,070 billion, compared to the growth of 28%. 60.9 billion RMB in local region nation's volume, up 41%.

year-over-year. Total outstanding balance at 107 billion RMB, up 28.0% year-over-year. Revenue at 2,980 million RMB, up 74.0% year-over-year. Net profit of 327 million RMB, an increase of 302.0% year-over-year. As demonstrated by the first quarter results, our profitability has continued to improve, with net profit margin rising to 11.0% from 4.8% in the first quarter of last year, and has grown steadily for the fourth consecutive quarter, and various operating indicators are moving in a positive direction.

To be precise, there are three highlights of the first quarter's performance. One is that we have strengthened the customer recognition, while accelerating the clear tail of assets.

Let me elaborate in more detail. There were three major operational highlights in the first quarter. First, as we enhanced our user risk assessment capabilities, we accelerated our pace in reducing high-risk user segments and therefore improved the overall asset quality. Second, we continue to refine operations and further optimize operational efficiency. Third, we have been implementing cost-efficiency initiatives. As a result, our profitability has been steadily rebounding.

First of all, in terms of asset quality, we have improved the construction of the wind control system. The focus is on the operation of high-quality old customers, gradually eliminating high-risk users. We have upgraded the user risk recognition tool, RR integrated model. First.

In terms of asset quality, we further pushed ahead on overhauling our risk management system, focused on maintenance and operation of high-quality existing customers, and gradually eliminated more high-risk users. We have iterated and upgraded the user assessment system, the risk-rending model, which automatically integrates a variety of risk models along with the combination of multidimensional risk factors into an overall user risk assessment scheme These upgrades help us to conduct more comprehensive risk assessments and, therefore, make more accurate decisions on users. After being put into use, the new loan volume in the first quarter contributed by Prime users increased to 88.0% from 77.0% a year ago. Secondly, in terms of detailed operations, we have upgraded our marketing system.

Based on the benchmarking system and user support, response, offer satisfaction, and so on. More than 10 models have been carefully disassembled for users to effectively identify users' needs and increase offer satisfaction. For some segmented people, after the application of the model, the operating profit increased by up to 70%. Based on this, we have completed several key strategy arrangements. Through the marketing platform, the marketing strategy is downgraded to greatly increase the activity of users. Under the new modernized operating system, the electricity consumption capacity is significantly increased. Second, in terms of operational optimization,

We upgraded our marketing system and segmented our users into more detailed and various categories. Based on the underlying customer tagging system and over 10 evaluation models of users' borrowing willingness, marketing preferences, responsiveness, offer set expression, and etc. For some certain customer groups, the application of this new detailed separation of user segment model pushed up the operating profit of that specific customer group by 70.0%. On this basis, we sorted out a marketing strategy decision tree structure and launched marketing strategies accordingly, which significantly boosted users' activities. Under this new optimized operational system, in the first quarter, our telemarketing capabilities have been significantly strengthened, and the loan volume contributed by the telemarketing channel grew by 92.0% sequentially. At the same time, the cost significantly decreased in a quarter, With telemarketing cost per sale fell 49% year-over-year, we expected to save 23.0% of the original annual telemarketing cost. In front of reactivating paid-off customers, the conversion rate increased 15.0% quarter-over-quarter. Loan volume from those converted customers grew 15.0% quarter-over-quarter. Additionally, these results were achieved with half of the marketing cost. Third, we have enhanced our profitability attributing to our continuous efforts in cost optimization initiatives and a further reduction in financing costs.

In the first quarter of 2020, G&A expenses stood at $97 million,

a 17.0% decrease from a year ago. This is a clear indication of our improved operational efficiency. Funding costs further dropped to 6.6%, which is 0.2% percentage point lower than last quarter and 1.6 percentage point lower from a year ago. It's worth noting that this is a historic low of funding costs during the past three years. In April, we successfully resumed our annual Financial Partners Conference, which got suspended during the three-year pandemic period. In the conference, we were very honored to have over 100 financial institutional partners with whom we will surely strengthen our business cooperation in the future.

We remain committed to investment in research and development as we firmly believe in technology is the core engine of our business growth. In the first quarter of 2023,

research and development investment, which $130 million, maintaining one of the highest technology input levels amongst our peers.

On the underlying data, Lexin deep-dive data blood is connected to data, which is equivalent to doing a detailed population review at the data level. Constructing the connection between the underlying data and the macro business model is Lexin's foundation for realizing decision-making, digitization, and naturalization. further developed the forecast prediction system, the mobile response system, the A-B test platform and other operating systems, and realized decision-making digitalization and automation.

On the data front, we have put tremendous effort in data mining and analysis of our entire data. Accordingly, we are able to find links and correlations among various data sets. And links between low-level fundamental data sets and business models a solid foundation of Lexin's data-driven and intelligent decision-making approach. Furthermore, we developed simulation predicting model, attribution model of normality, A-B testing platform, and etc., all of which empowered management to steer business in a more data-driven and intelligent manner.

Lexin has been actively exploring and using new technologies to improve our work efficiency and customer experience. Remember that we accelerated the application of AI big models in the hot business, which is in the development of code support, design, creative production, telecom and customer service, and other fields. It has fallen and achieved significant efficiency increases. Using telecom as an example, after the application of AI big models, the rate of受信转化率相对外采技术提升了70%,当日下单转化率提升了10%,

We have been continuously exploring the utilization of new technologies in optimizing operation efficiency and users' experience. In the first quarter of 2023, we expanded the application of our AI large language model in our business at a faster pace. we saw a noticeable improvement in efficiency among the application areas including coding assistant tools, initiatives of design, telemarketing, and smart customer services. For example, the application of this AI model in our telemarketing scenario pushed up credit line approval rate by 70% versus the technology service supplied by vendors. and also boosted order placing rate on the exact day that borrowers are granted with credit line by 10%. Looking ahead, we will also comprehensively apply the model to the areas of risk management, anti-fraud, and etc.

Lexin has gained economic advantage and has also gained further enhancement.

In addition, we further enhanced our existing unique Lexin ecosystem.

First of all, the e-commerce business. E-commerce business reached 1.13 billion GMV, an increase of 69.0% from last year. Cumulative customers grew by 71.0% compared to last year.

The robust growth of GMV and users in e-commerce business effectively fill the engine of Luxin consumption ecosystem.

Second,

The technology impairment SaaS business achieved tangible progress, therefore won the recognition from various financial partners, including local commercial banks with AUM over trillion RMB, regional, urban, and rural banks. The technology impairment service facilitates our cooperation with financial partners and deepens our business relations.

In terms of stock exchange business, we have accumulated a lot of experience and advantages through the online direct profit and loss model. Third, we plan to expand our offline sales team and leverage our expertise in direct sales channels in light of the gradual recovery of China's economic activity.

Our offline acquisition channels bring more first-hand user information, hence more accurate credit assessment, and eventually creating a unique competitive advantage.

The reason why we achieved a good result in the first quarter is mainly due to our continuous improvement of customer identification, the continuous improvement of asset quality and customer group quality, and the continuous and detailed operation of door-to-door effects, The second quarter will be a long-term process due to the recovery of the macroeconomic and consumer economy. We will continue to maintain a prosperous business and adhere to the priority of asset quality. The expected second quarter trading volume will be 6.3 billion to 6.35 billion yuan, with a growth rate of 28% to 29%.

The strong results in the first quarter were mainly attributable to our risk management capabilities upgrading in customer risk assessment and therefore the improvement in customer and asset quality. It is also due to our continued refining of operations and cost reduction initiatives. As for the second quarter, we understand the economic recovery and resuming consumption is a long process. We will continue to undertake a more prudent approach. Based on our preliminary estimations, loan volume in the second quarter is expected to reach 63 to 63.5 billion RMB, a 28% to 29% growth year over year. Next, I'll hand over the call to our CFO, James, to share more detailed financials. Thank you.

Thank you, Jane. I will now provide more details on our financial results. Please note that all numbers are in RMB unless otherwise stated. In the first quarter, we continued our fourth consecutive quarters of recovery, both in our overall business and in our financial numbers. We expected this trajectory of turnaround to continue in light of the rebound of China's economy and our dedicated efforts in optimizing operations. The strong performance in the first quarter was a result of the management's continuous efforts in overhauling our risk management, focusing on better quality user segments, upgrading our technology and operational capabilities, as well as our new cost restructuring initiatives. First, please let me explain at a high level what happened in the quarter as compared with the same quarter of 2022. The loan originations for the quarter reached $60.9 billion, an increase of 41% year-over-year, beating Q1 guidance we gave earlier. Revenue grew by 74.2% year-over-year to reach around $3.0 billion for the quarter, which was mainly driven by the GMB growth and an increased loan balance, which reached $107 billion. The weighted average APR stood at approximately a little over 24% for the fifth quarter, close to around 1% points lower than a year ago. Loans with APR under 24% now make up more than 80% of all loans. Partially offsetting the negative impact from the lowered APRs on our loans was a decrease in our cost of funding from 8.2% a year ago to 6.6% in Q1. It's worth noting that this is a historical low of funding cost during the past three years. Loan tenors increased to 15.1 months versus 12.3 months a year ago. As we emphasized last quarter, overhauling risk management remains our top strategy for the year. We continue to focus on upgrading to better credit user segments and rebuilding the risk team, the systems, and the process, and the infrastructure. Gerrit will elaborate more on this shortly. The improved results from our efforts can be partially seen in our 30-day plus delinquency rate, which improved to 4.57% in the first quarter as compared to 4.62% in the fourth quarter of last year. The 90-day plus disincreasing rate stood at 2.53%, basically remaining stable as compared to the previous quarter. This was due to 90-day plus disincreasing rate metric is a more lagging indicator than 30-day plus metric. In Q1, we have been pushing ahead a series of cost restructuring initiatives that we launched last year. We have seen some further improvements to operating expenses. Total operating related costs and expenses, including processing and serving costs, sales and marketing, R&D, and G&A, as a percentage of average loan balance stood at 1.16% versus 1.28% in Q1 of last year. This cost optimization happened despite of a slight pickup of sales marketing expenses, while G&A, R&D, and processing and servicing costs all came down. We will remain committed to undertaking these cost restructuring initiatives and expect our efforts to bear more fruit in the long run. As a result of the affirmation, we are able to report net income of $327 million, an increase of 302% year over year. The net margin improved to 11% versus 4.8% in Q1 last year. This clearly presents a steady upward trajectory of our operation result, with each quarter improving over a year ago. Apart from the above year-over-year analysis, I would also like to elaborate a little bit more on the progress achieved through quarterly comparisons. Total GMB was $60.9 billion, an increase of 8.7% quarter-over-quarter, as we grew the business with prudent approach and put risk management as a top priority. In the first quarter, we saw the GMB on our e-commerce platform came down slightly from boosted high level during single day shopping festival in Q4 last year. If we carve out the revenue from e-commerce business, total Q1 revenue grew by 4.5% quarter over quarter. Considering impact of e-commerce business seasonality, total revenue for the whole group stayed at about $3 billion, almost flat on quarter-over-quarter basis. Take rate fell slightly to 2.5% from 2.6% last quarter. The minor fluctuation in take rate is a blended result of the more booking of provision due to longer tenor loans and the continuous improvement in asset quality and the reduction in funding costs. Operating expenses stayed almost flat by a minor 1.6% increase quarter-over-quarter, contributing to pickup of sales and marketing-related costs in user growth. As a result of affirmation, we achieved a sequential growth in the net income of 8.7% and a boosted net margin to 11% from 9.9% in last quarter. To summarize, We have delivered a noticeable improvement during the first quarter from both a year-over-year and a quarter-over-quarter perspective. This marks the fourth consecutive quarter of V-shaped recovery, both in top line and bottom line, since we hit the lowest point of operational results in Q1 last year. As we mentioned last quarter, although we are fully aware we have a long way ahead in our turnaround, the year of 2023 unfolds with a good start, indicating we are well on track. Next, let's take a detailed look at the financials. As mentioned, our total operating revenue for the first quarter was $3 billion. representing a decrease of 2.2% quarter-over-quarter due to seasonality of e-commerce business and an increase of 74.2% year-over-year, mainly driven by the credit facilitation services and the e-commerce business. Revenue from credit facilitation service was approximately $2.1 billion, representing a 7.8% increase quarter-over-quarter and a 136% increase year-over-year. which is driven by the GMB growth. Revenue from tech empowerment service was $368 million, representing 10.9% decrease quarter over quarter and a 26% decrease year over year, which was primarily due to the change of product mix among various tech empowerment services. Revenue from installment e-commerce platform service was $499 million, representing a decrease of 25.9% from the last quarter and an increase of 56.6% year-over-year, which is due to the seasonality of e-commerce business. Moving on to the expense side of the quarter, sales and marketing expense increased by 4% quarter-over-quarter, which was mainly due to our stepped-up investment in acquiring better quality users. Our goal is to upgrade to better quality customer groups and obtain higher LTV. While we're taking a prudent new acquisition strategy now, we will keep on closely monitoring macro data as China's economy is gradually recovering and it sees the growth opportunity when the right timing comes. Research and development expenses decreased by 4.4%. 5% quarter-over-quarter and a decrease 15.1% year-over-year to $129 million due to efficiency. G&A expense stayed almost flat on a quarterly basis and a decrease of 17% year-over-year to $97 million. It's a noticeable cost efficiency for each achievement that a G&A expense remained at almost the same level on a quarter-over-quarter basis while our top-line GMB maintained an upward momentum due to a series of cost initiatives. Going forward, we plan to step up efforts in this regard. Net profit was approximately $327 million in the first quarter, a 8.7% increase quarter-over-quarter, and a 302% increase year-over-year, which beats high end of our initial expectations. At the end of the first quarter, the company had a cash position of around $6.5 billion on hand and a net equity position of $9 billion. Finally, I would like to discuss our outlook for the second quarter of 2023. As we know, economic and consumption recovery usually will take time, as evidenced by the ongoing current quarter's modest growth. Therefore, we remain cautious and are monitoring closely on the overall macro and consumption outlook. Based on the company's preliminary assessment of the current market conditions, total loan originations for the second quarter of 2023 are expected to be around 63 to 63.5 billion, representing an increase of 28 to 29% on a year-over-year basis. These estimates reflect the company's current expectation, which is subject to change. The strong results of first quarter demonstrate clearly that our turnaround is well underway. In the long run, our dedicated efforts in risk management, cost initiatives, as well as new user acquisitions will establish solid foundations for our long-term goal of sustainable growth. With that, I would like to turn the call over to our president, Jared Wu, who will discuss our risk management.

Jared, please go ahead. Thank you, James.

Good morning and good evening, everyone. It's my pleasure to speak with all of you again.

Let me introduce the company's progress in risk management. Since the beginning of this year, the macroeconomic economy has gradually recovered. In terms of the company, we continue to carry out the strategic layout of the first task of wind control. Continue the relatively stable wind control strategy and cautious harvest strategy. At the same time, continue to increase the cleanliness of high-quality customers. In the first quarter, the tax rate indicator continues to drop. The quality of the asset continues to improve. By the end of the quarter, our expected rate of more than 30 days compared to the previous quarter has improved to 4.57%. Five points have dropped compared to the previous quarter. Next, I'd like to elaborate a bit more regarding our risk management measures and improvements for the past quarter.

Ever since the beginning of the year 2023, we saw a gradual recovery of China's economy. Accordingly, at the company level, we continue to implement our unwavering focus on risk management and the continuation of a prudent risk management and customer acquisition approach. In addition, we have been allocating more resources and putting more effort to better serve and favor our prime customers. In terms of our risk modeling, we have been continuously iterating our core values and enhancing our user risk assessment capabilities. In the first quarter of 2023, the day one delinquency continued to drop, and overall asset quality got improved, with 30-plus day delinquency down five-fifths quarter over quarter at 4.57%, and 90-plus day delinquency being the more lagged indicator, standing unchanged sequentially at 2.53% as of the end of the first quarter. Currently, as business and daily life of people continue to normalize and consumer confidence being gradually restored, we will continue to hold risk management as one of the top priorities in business operations, and we expect the overall asset quality to continue to maintain a positive upward momentum.

In the first quarter, increasing the quality of our customers is still our most important goal. In order to achieve this goal, we are continuing to do a lot of physical work in this quarter, including the following. First, we continue to increase the risk management system around the target of risk-driven business, increase the precision and overall efficiency of risk management, further divide the customer group and increase the risk recognition dimension of the customer, and at the same time continue to promote high-risk customers and optimize the asset structure. We focus on the coverage of real-estate data and strengthen the deep digging and application of real-estate data. At the same time, we continue to introduce more nuclear data sources. Combining the digging and expansion of internal behavior data to ensure that we can further separate the customer group and clarify the identification and risk. Third, we continue to stack and upgrade the model of user division of different customer groups. The ability to identify customers has also been continuously improved. This is the most important support for us to continue to improve the best customer ratio. It will also be one of the most important projects we will continue to invest in.

In the first quarter, increasing the proportion of prime customers remains our most crucial objective. Thus, we continue to work on upgrading our risk management system, including the following key initiatives. First, we continue to iterate and upgrade our risk management system under the business strategy of risk-driving operations. It improves the granularity and the overall efficiency of risk management, further refining our customer segments and increasing the depth and width of our user identification capabilities, while continuing to review high-risk customers and optimize our asset structure. Second, we put heavy emphasis on investing in the coverage of PBOC credit data and strengthen the utilization of credit data. In the meantime, we continue to introduce more compliant data sources combined with the thorough usage of internal consumption behavioral data to ensure that we can identify customer credit profile more accurately by further refined customer segmentation accordingly. Third, We continue to iterate and upgrade model matrix for different customer segments. And our ability to assess customer credit profile has also got further improved, which is the most essential pillar for us to increase the proportion of client customers and will be one of the most key projects in which we continue to invest. We believe that in the remainder of 2023, We will make more breakthroughs in our user identification capability.

2023 is the year of China's economic recovery. We will strive to upgrade the bottom-level core capabilities of risk management, and accelerate and strengthen the risk management mechanism. As James mentioned earlier, we maintain an optimistic view on China's economic environment, stick to the priority principles of risk management, and check the strength of the domestic market. We stick to the core principles of risk management. Thank you.

2023 is the year of economic recovery in China. We are committed to upgrading our core risk management capabilities and accelerating the strengthening of our refined risk management systems. As Jay and James mentioned earlier, we maintain a cautious view of the macroeconomic environment, adhering to the principle of risk-driven, monitor the market externally, and build capacity internally. Above all, we firmly believe that with a first vision in mind and a solid infrastructure, we can continuously generate sustainable long-term returns for all shareholders. Thank you. This concludes our prepared remarks. Operator, we're now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Once again, that's star 11 for questions. Our first question comes from the line of Frank Chin from Credit Suisse. Please ask your question, Frank.

Thank you, management, for taking my questions. This is Frank from Credit Suisse. My first question is regarding the supply and demand dynamics most recently. In the first quarter and second quarter today, how would you describe the recovery of credit demand? And on the supply side, is there any change in terms of risk appetite? On the other hand, could the management provide some more color on the strategic or operational focus for the rest of the year? Thank you very much.

to improve the operational capability of the whole, especially the improvement of our entire risk recognition, to help us to better and more accurately identify good customers and bad customers. Therefore, the management of the old customers brings us a way to measure the needs of the entire customer. As you all know, in fact, Lexin's entire user scale is actually not small. The scale of measuring customers is not small. I believe that among our measured users, as we The whole ability to identify and mechanically transport continues to improve. The whole value and potential of the amount of customers will be gradually discovered. In fact, from the current perspective, the second quarter has actually been a few months. From some of the data we have seen, it is actually quite stable overall, but it is certain that this wave of high winds after the Spring Festival is over. From the point of view of the entire demand, it is a little slower, but it is still on a path of growth. This is the current situation on the demand side. I think in terms of demand, we actually have an extra different place on our side. That is, we have business, we have e-commerce, and we have a consumer scene. In fact, we can be in the whole borrowing demand is not so strong and there is no need for it. In fact, we can use the marketing method of e-commerce to attract more users to consume through the discount of goods. From there, we can reach an entire 4G user and carry out an entire process that requires such a process. So I think in the second quarter, actually, you see, recently we started preparing 618. I think 618 is another good opportunity to stimulate more users to generate demand. So I think this is also a unique place. From the perspective of funds, I think there is still plenty of funds available. Because the total assets that the national fund can invest today is relatively limited. After 10 years, we have still received financial institutions' approval. In the last quarter, we also held a joint partner meeting. We invited more than 100 financial institutions to the scene. So I'll do the translation. Thank you, Frank. In terms of demand side, as you can see from our first quarter's results,

Our overall loan volume have increased and we actually saw the rebound of the overall demand in the first quarter. It was mainly attributed by a couple of factors. The first one with the COVID and the lockdown quarantine being over, there was a spike in consumption needs and also the overall poverty. Second, it was mainly due to our refined operations. as well as the capabilities in risk assessment being increased, we were able to better recognize customers to better serve the right customers and the good existing customers. In the sense that most of you already knew that we have a very large existing customer pool. With our improved risk assessment capabilities, we are able to better pick them out and better explore their value from the existing customers. And as of right now, in the second quarter of 2023, as we can see the data right now, the trend is still stable. But after spring break spiked past, the demand has been slowing down a little bit. But the trend of increasing is still remaining relatively strong. And in that sense, we also have different products. We have our own ecosystem. We have the e-commerce, a very special consumption scenario. When the lending need is relatively not as strong as the previous quarter, we have another option to create demand, which is the discount on products to attract our customers, whether it's new, whether it's the existing one, to make consumptions and to create demand. So the second quarter, as of right now, we are preparing the 618 Festival, which would be a great opportunity to generate more demand, thanks to our unique ecosystem. When it comes to the funding cost side, I'd say the supply is still relatively strong and sufficient right now. Based on the current national situation right now from our funding partners, they have limited options to really invest in. And after 10 years, our risk level and our capabilities in risk management are recognized and approved by them. And also, as you might know already, we had this cooperation conference day with our funding partners and all of them showed the willingness to make the cooperation deeper. And also, as you can see, our funding cost actually lowered in the first quarter, and the overall supply is still relatively strong. I hope that answers your question, Frank. Thank you.

In terms of the focus of this year's work, we will continue to do our best this year. I think, first of all, we need to improve our risk management capabilities. We need to improve our entire asset structure in order to reduce the risk. In terms of risk, we are working on a risk 2.0 system. Once this system is on the line, we will be able to improve the recognition and risk management capabilities of the entire user. So we will gradually start to adjust and operate this system. I believe that after this is launched, our entire risk management capacity will go up another level. The other one is that we will continue to push back some of our high-risk customers. I think it will establish a normalization of the entire high-risk and push back the entire mechanism and system. Secondly, I would like to say that we still need to continue to build up the ability of our entire X1Hawk. I think LeXin itself has the advantage of having a scene and a business environment. And we also have the advantage of the entire team. Therefore, we will strengthen our advantages to build up the ability of our X1Hawk. The third is that we will continue to run it in a refined way to improve the LTV of the user and improve the efficiency of our entire operation. The fourth is to continue to do our work of reducing the cost. The work of reducing the cost in the first stage is still relatively obvious. We see that our entire operation, sales, development, management, cost, and the overall balance of the total balance, from the 1.28 of the whole a year ago, has increased to 1.16. In terms of our key strategies, there are four main ones. The first one is the risk management capability upgrading. We have been undergoing certain strategies to upgrade our infrastructure and to improve

to lower risk level we are preparing this management 2.0 system and when it's ready it will be we will get the upgrade in capabilities in risk management hence we are actually doing it step by step to adjust and to operate when it's ready our capabilities in risk management and identifying in user risk will be significantly upgraded And also, we continue to do the elimination of high-risk users, and we are in the progress of making it a common operational thing to do the routine elimination of the high-risk users. Secondly, we'll try to continue to differentiate ourselves from others in customer acquisition. Like I said earlier, we have different scenarios, like e-commerce scenario, and we have a very strong offline team. These are the advantages that will help us to strengthen our own capabilities. And third, we'll continue to do the refined operations to further increase the customer's LTV as well as the operational efficiency. Fourth, we'll continue to go through, undergo the cost efficiency initiative. As you can see, in the first quarter, it shows some prominent results. The percentage of our operational costs as over the outstanding loan balance actually decreased, and our net margin increased to 11%. And for the rest of the year, we aim to continue to increase our own profitability. That answers your question, Frank.

Right. Thank you. Our next question comes from the line of Alex Yeh from UBS. Please go ahead, Alex.

Good morning, Mr. Guan. My first question is to ask about the amount of loans we receive in the second quarter of April and May. Can you share with us the situation and the trend? And what is the current share compared to our previous expectations? Secondly, regarding asset quality, can you share with us some more promising asset quality indicators? Is the situation in April and May continuing to improve? So I'll translate for my question. First is on the low volume run rate in April and May. Could you share with us how has the sequential movement been so far and how does the growth you have seen now compare to your previous expectation? Second question is on your asset quality trend. Could you share with us some of the early effects for the indicators, the trend in April and May? And do we expect further improvement from here? Thank you.

Because our second quarter, actually, the entire transaction amount we gave is expected to be about 6.3 to 6.35 billion. I think this is our estimate for the second quarter, but the figures for the month-to-month, I can talk about some figures for you to consider in the first quarter. In fact, the whole figure in February is 8% growth compared to January, 2% growth in March, and 2% growth compared to the month-to-month in April. So the overall view of the current government is that So as you heard already, for the second course, our guidance for the loan volume was

63 to 63.5 billion. But I could share some month over month in the first quarter results with you. The numbers of application-wise, there was a minor peak in volume after the Chinese New Year. In the month of February, it showed a 8.0% increase quarter over quarter. For the month of March, it showed 2% month over month. And as of now, May, we are seeing a minor decrease in the month over month as the COVID passed and the spike kind of slowed down a little bit. We're seeing a little bit slow down in demanding, a bit entering the second quarter, but it's still in line with our management team's expectation.

In terms of risk, I think we saw that in the first quarter, our overall risk was actually quite good, and then we maintained a stable and effective process. In fact, in the second quarter, from some early indicators, we can see that the entire indicator is very stable. Another observation point is that the structure of the assets we add is better. The total assets we add every month, whether it is 1 to 3, it continues to rise. The ratio of 6 to 8 continues to decline. So I think from the structure of the entire new asset, it is actually a better structure. So we believe that with the continuous improvement of the new assets every month, we still have room for improvement in terms of future risks.

Okay, in terms of risk, we're seeing the first quarter's risk being stable, stable and decreased. And for the second quarter, as of right now, certain early indicators is stable right now. But from the new loan perspective, the structure, the overall structure is actually better, whether it's the RR123, the percentage of RR123 being increased, the RR628 percentage being decreased, from the new loan perspective, they are overall better. And with the monthly new loan structure being continually improved, our overall risk level will be improved in the future, and there are still some optimizers in rooms when it comes to the overall risk level.

Hope that answers your question, Alex.

Right, thank you. Our next question comes from the line of Yada Li from CICC. Please go ahead, Yada.

Thank you for this opportunity. I'm Li Yada from CICC. Today, I would like to ask two questions to the management team. The first question is about the choice of the housing model in the future. I would like to ask about the balance of the proportion of light and heavy assets in the future, as well as the prospect of the model stand-by, and whether we will increase the scale of the payment on the table in the future. The second question is whether the management team can share in detail about the progress of our分期乐商城 and other new consumer businesses or products, as well as the prospect of the future. Thank you very much. Then I'll do my translation. Hello, management. This is Yada from CICC. And my first question is regarding the choice of the lending model. And could you please give us more color on the trend of the credit facilitation and the risk sharing model or tech empowerment services in the future? And will there be any plans to increase the on-balance facilitation? Secondly, I was wondering about the recent updates and outlook of Fenqi Le and other new consumption business. That's all. Thank you.

So I will take a crack at the first part of the question, and Jay will answer the second part of your question. The first part of the question is related to risk-taking and profitability. Obviously, at the company level, we always try to achieve the balance. Obviously, it makes sense that if risk improves, then I want to do a little bit more so that I increase the profitability. If somehow the risk is worsening, obviously I don't want to do more, right? I want to do less so that I can retain my profitability. So that has been our kind of attitude. Resulted out of this basically is reflected here in terms of the proportion of the business where we take risks, that is in the loan facilitation business and in rev share business reflected in our tech empowerment part of the business. Right now, the rev-share business, basically, we don't take much risks in this part. It accounts for roughly 26% or so. And in the last year, several quarters, has been hovering between, say, 20% to 30% or so. So we are watching very closely of the overall macroeconomic data and our overall risk indicators. If the overall macro data continue to improve, and our asset quality continues to improve. Obviously, the overall credit situation is improving, then it doesn't preclude us from really taking a little bit more risks so that we increase the overall profitability for the company. So basically, that's our kind of thinking, if you will, to run the business. Now, Jay, for the second part of the question.

Okay. We know that Le Xin and we have our own unique place, which is our entire business. The advantage of the environment and the scene So in the field of e-commerce In fact, we see that In fact, our entire growth is relatively strong Especially in a country of this kind of e-commerce Still in a more intense competition In this case, we are in the first quarter We can grow by 69% Our trading users grow by 71% Revenue grows by 57% In fact, it is not only faster than our big plate I think it will grow faster than the entire industry In fact, this is where our e-commerce is more unique, that is, we are a credit-driven entire consumer e-commerce. So the people we serve, in fact, everyone still has credit consumption needs. I think in fact, in the whole of a country, in the whole of a current environment, especially in the case of a large platform, where everyone's demand for interest is getting higher and higher, in fact, it gives our e-commerce a more unique kind of operating space. Then I want to say that this is the first point. The second point is that e-commerce is actually in our entire ecosystem. In the future, it will be in the management of our entire customers as well as the delivery and storage of customers. It still has the same effect as our housing and consumer finance business. So I believe that in the future, everyone can see this aspect. We will also have more progress. The other one is that in our entire ecosystem, I want to talk about this business of our general meeting. We will not rely on the offline BG to do business offline. With the recovery of the whole economy, I think in the offline team, their entire customer, from the cost of the customer to the risk of the entire customer, we can see that it still has a certain advantage. The current online traffic is actually a more and more scarce resource, and it is more and more expensive. In fact, offline, It can help us to evaluate each customer better and more comprehensively. It can be more precise to identify each user, his whole will, and his whole repayability. Compared to the entire online model, especially in this era of pure competition, I think we can understand customers better and provide products to customers better. It will be a good advantage. So in the long term, I don't think we will gradually start to increase the investment in this area to form a more diversified entire customer and business ability. Yes, I think the other one is to talk about our entire financial technology business. Financial technology business, it is actually the standardization of the entire ability and business ability that we have accumulated over the past ten years. So we now have five or six companies that have achieved better cooperation with financial institutions and have reached a certain scale. So we can see that in fact, In this respect, to a certain extent, it is a currency-based process that is equivalent to the energy of the past. On the other hand, the service we provide to the banks can strengthen the relationship between the funders and our entire cooperation to deepen the cooperation. So we now see some banks that cooperate with us, they give us a capital cost that is actually lower than our average today. So I think this As you know, we have our own leasing ecosystem.

E-commerce-wise, the overall increase has been very strong, especially with other e-commerce peers or others in the industry being in the very heavy competition. As I shared already, in the first quarter, not only the volume in GMB increased year-over-year, but also the revenue, as well as the cumulative trading customers. They are only larger than our main business or other businesses within the company. exponentially actually larger than the overall increased speed in the industry. So the customers that we serve in our e-commerce areas are mostly customers with actually credit consumption needs. Under the current situation right now, the overall macro economy and environment, with ATR requirements being a little bit higher, the requirements being a little bit higher, actually give the e-commerce sector a bit more opportunity to increase and expand a little. Furthermore, e-commerce could actually help us with the customer acquisition and as well as the customer retention with our main business, which is the loan facilitation business in the future. Next is our offline Puhui team. Our offline Puhui team mainly relies on the offline BD operations, with right now the economy being resumed, being in recovery. The team actually helps with customer acquisition costs and as well as risk level. we can see there are a lot of advantages comparatively. When the online traffic being more expensive as well as being more rare, the offline Puhui team helped us to evaluate customers more accurately as well as gave us the capability to understand their willingness as well as to keep them in retention. Especially with the existing customers competitions, we get to know them better via Puhui team, and we will continue to increase the investment on our offline Puhui team to help us to differentiate when it comes to customer acquisition front to better acquire better customers. And another business I'd like to mention is our tech empowerment SaaS business. It's pretty much a accumulated experience of 10 years of standardized capabilities. We already got into cooperation with a relative sizable volume with five or five to six of our banking partners and our funding partners. It's pretty much a monetization of our past experience. We use our experiences and capabilities to help them, and in return, they strengthen the cooperation in our main business, helping us with a relatively lower funding cost than the current average funding cost. So I think this is a very unique system Belushi has. We believe the cooperation between aforementioned business will be strengthened and will be more interrelatable in the future to help us to differentiate ourselves amongst our peers. Hope that answers your question, Yara.

Thank you. I'm sure you know further questions. I'd now like to turn the conference back to the management team for closing remarks.

Thank you again, everyone, for joining us. If you have further questions, please contact us via our contact information available on our IR website. Thank you.

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.