LexinFintech Holdings Ltd.

Good day and thank you for standing by. Welcome to Listening FinTech second quarter 2024 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you 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. I'd now like to hand the conference over to your first speaker today, Ms. Mandy Dong, head of IR Policing. Please go ahead.

Thank you, Amber. Good morning and good evening, everyone. Welcome to Le Xin's second quarter 2024 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are our CEO, Jay Hsiao, CRO, Arvin Chow, and CFO, James Zheng. Before we get started, I'd like to remind you of our safe harbor statement in our earnings press release, which also applies to this call. During the call, we may refer to this outlook and forward-looking statements, which are based on our current plans, estimates, and projections. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Thus, unless otherwise stated, all figures mentioned are in RMB. Jay will first provide an update on our overall performance. Arvind will discuss risk management updates. Lastly, James will cover the financial results in more details. I will now turn the call over to Jay. Please kindly note, different from the past, Jay will give his whole remarks in Chinese. Then the English version will be delivered via Jay's AI-based voice. Jay, go ahead, please.

Hello, everyone. I am very happy to share with you the results of the second quarter of 2024. Under the current macroeconomic environment and industry situation, we adopt a safe and stable business strategy, insisting on both risk and data drive. In the quarter, the company actively controls the scale to improve review standards. The overall risk is gradually improved, and the company's profits are steadily rising. The second quarter transaction amount is 5.1 billion yuan, the management and delivery amount is 1,152 billion yuan, the revenue is 36.4 billion yuan, and the currency growth is 12.3%. The profit is 2.3 billion yuan, and the growth rate is 12.4%. Based on the financial situation in the first half of the year, the company will approve the 0.072 US dollars of ADS to send cash to shareholders. Next, I will introduce a specific business situation in the second quarter. In terms of risk, the company balanced the growth of risk and scale in the second quarter, and continued to reduce and increase the amount of risk assets. to strengthen the construction of the underlying energy. The asset quality and structure have been further optimized. Specifically, in terms of new assets, we have deepened the low-end growth strategy that was previously effective, monitoring the new asset quality, and improving the quality of the user ratio. On the one hand, we continue to optimize the RTM model and housing strategy of the main investment channels. The quality of the channels and the added user ratio have been relatively improved, exceeding 40%. On the other hand, Through the low-end growth strategy, we implement low-value accuracy. According to the number of users, we show the dynamic adjustment of the number of users. In order to increase the pass rate and control the risk. For users with different risk levels at the stage of受信, we fully utilize differential pricing, amount of money, and other tools. Increase the quantity of new and high-quality assets. Promote the downfall of the overall asset risk. Through the above measures, in the second quarter, the risk rate of new customers is increased by 20% compared to Q1. The new client's new asset early risk indicator, FPD7, decreased by 23% compared to Q1. The advantageous asset scale ratio increased by 8%. The new client's return cycle is further shortening. As for the management of stock assets, in the second quarter, we appropriately strengthened the repayment system, and optimized the user's期待扣策略. The full amount of assets decreased by 7% compared to the quarter end of the second quarter. As for the tail end of the client, to reduce long-term risk losses and increase profitability. Automated processing of high-risk users can be carried out by machines. Machines can produce strategies and suggestions for processing at the level of small and medium-sized companies, and further enhance the efficiency and efficiency of high-risk users' processing. In terms of wind control and energy construction, in the second quarter, from data modeling, analysis, monitoring, strategy, and so on, further deepening the entire risk management system. Specifically, our CIO will further introduce it to you in the following presentation. Through the addition of asset management, storage asset management, and the construction of underlying capabilities in three aspects, in the quarter, the company's added asset risk gradually improved, and the total asset risk gradually decreased from the high point. At the end of the second quarter, the return rate decreased by 7% from the beginning of the quarter, and the return rate of 30 days increased by 1.5% from the beginning of the quarter. Looking back at the situation of risk management in the past year, from the beginning of the second half of the year, this wave of risk cycle has had a great impact on the entire industry. In terms of popularity, our risk capacity did not change in time to match the market, but after the risk team and risk system were fully upgraded at the beginning of the year, we saw a very obvious increase in overall anti-risk capacity. The company's system-based risk cycle capacity is constantly improving. Although we want to achieve profit, and scale. Although it takes a little time to reach the obvious growth in scale and profit, what can be foreseen is that the increase in risk capacity will gradually increase the profit space of the company. In overseas business, the second quarter of the Mexican market continues to maintain a high rate of growth. The loan scale is 61% in the first quarter, and the revenue growth is 113% in the second quarter. In terms of capital costs, The company's capital cost in the quarter fell 58 bps in the first quarter. In May and July, the company issued two ABS projects respectively, with a total of 600 million yuan, and received a lot of high-quality fat. With the decline in domestic interest rates, we will cooperate with financial institutions with more risk models to balance risks and scale to increase revenue. In the second quarter, the company has invested 1.43 billion yuan in R&D. AI large model further deepens the application. In the application of telecom and after-sales management, the accuracy of large model real-time image recognition is further improved. In the second quarter, the accuracy of machine image recognition in telecom scene increases by 98%. In the after-sales management scene, the accuracy of image recognition reaches 91%. In the application of code support, in the second quarter, AI large model code support achieves the landing and use of 100% of technical personnel. comprehensive improvement in the efficiency and accuracy of programmer code writing, innovation and exploration on AI large models, and enthusiasm in the second quarter to obtain the annual single award of the Asia-Pacific Business Technology Award. In terms of consumer protection, the second quarter of the company further strengthens the digitalization and systematization of customer service, including the improvement of the standard check system, the rapid coordination of problems, response problems, to complete the consumer consultation communication mechanism and customer service management system, so that the first-tier customer service can be fully authorized to respond quickly and deal with customer demands, and to establish multiple customer tracking service processes, including a series of management systems, training, sales behavior tracking processes, etc., to improve customer service experience from the core of the business system, and to better protect consumer rights. Looking forward to the second half of the year, The current external environment, we continue to follow the principle of risk management priority. The focus is on the following points of work. In terms of the risk return to the normal range, we have begun to promote the growth of scale stability. In the past six months, we have increased the construction of risk capacity. The risk management system and the detailed operation of people are constantly improving. Added assets have returned to a healthy and reasonable level. Next, we will increase the strength of the four projects. The advantage of operating in the context of the company is to gradually promote the stable growth of scale At the same time, we continue to invest more resources in the price strategy and the price strategy, and we are confident that we will gradually return to the history of better profit and loss on the more detailed operation of the customer by dividing the product and the customer group. Second, to play a good e-commerce business. Some of the advantages of Lehua Card's online and offline high-end consumption scenarios are to strengthen user consistency and improve user activity. e-commerce business for different users to provide more product choices, including the selection of products for high-end customers, as well as products for growing customers and extremely cost-effective products. For Lehua Card, we will, through the diversified business system of the customer group and the expansion of customers in different scenarios, at the same time create a dedicated full-time system to further improve the active transformation of high-end users, and drive the entire process of high-end users. Third, we actively carry out the layout of overseas markets, Good morning and good evening everyone. It is my pleasure to share with you our performance of the second quarter of 2024, amid the current macroeconomic environment and industry landscape. We have adopted a prudent and steady business strategy, adhering to a dual-driven approach of risk management and data analytics. During the quarter, we proactively controlled our loan origination pace, tightened credit standards, and overall risk levels have been gradually improving, with our probabilities steadily increasing. In the second quarter, total GMB of loan origination reached 51.1 billion RMB. The managed loan balance stood at 115.2 billion RMB. Revenue was 3.64 billion RMB, an increase of 12.3% quarter-over-quarter. Its profit was 230 million yuan, an increase of 12.4% quarter-over-quarter. Based on the probability in the first half of the year, the director has the cash dividend distribution of approximately $0.072 per 80s continuing to return values to our shareholders. Next, let me elaborate on our business performance in the second quarter in terms of risk management. We managed to strike a fine balance between business growth and asset quality, continuously resolved and cleared existing assets, and strengthened profitability. As a result, asset quality was optimized specifically for newly issued assets. deeply implemented the effective low and growth strategy, strictly controlled the quality of new assets, and increased the proportion of high-quality users. On one hand, we continuously optimized RTA model and bidding strategy of major acquisition channels, resulting in a more than 40% comparative increase in the proportion of high-quality channels. On the other hand, through the low and low strategy, we implemented low credit line limit admissions and dynamically adjusted limits based on subsequent user performance. This approach increased the approval rate while maintaining risk exposures. We utilized differentiated pricing, credit level, and other tools for users with minimal risk levels at the credit approval stage to expand the volume of high-quality new assets down overall asset risk. As a result of these measures, the approval rate for new customer credits increased by 20% compared to Q1. The early risk indicators, SPD-7, for new customer assets decreased by 23% compared to Q1. The proportion of high-quality asset volume increased by 8% compared to Q1. And the payback period for new customers further shortened Regarding the management of existing assets in the second quarter, we moderately enhanced refinement reminders, optimized the overdue deduction strategy for users, resulting in a 7% decrease in the day one delinquency rate at the end of the second quarter compared to the beginning of the quarter. For tail end customers, we implemented measures such as transaction control and limit reduction to reduce risk losses and improve profitability. by applying negative assets clearance robots for the automated handling of higher-risk users, these robots can generate disposal strategy suggestions within hours, significantly improving the efficiency and precision of handling high-risk users. In terms of building core risk management capabilities, in the second quarter, we further deepen the upgraded management system of the dimensions of data, models, analysis, and monitoring and strategies. Our CRO will provide a more detailed introduction in the next session with the measures taken in the management of newly issued assets, existing assets, and core capability building. The risk of newly assets has gradually improved during the quarter, leading to a gradual drop in the overall asset risk from its peak. By the end of the second quarter, the day-one to month-week ratio had decreased by approximately 7 percent of the core, and the 30-day collection rate has decreased by approximately 1.5% compared to the beginning of the core. Reflecting on the past year's risk management work, the credit cycle within the loan facilitation sector that began in the second half of last year has had a significant impact on the entire industry. Our previous risk management capabilities did not properly match the market changes. However, After the comprehensive upgrade of our risk management team and risk management system at the beginning of the year, we have seen a very noticeable improvement in our overall risk management capabilities and business resilience. Our ability to navigate through credit cycles has been continuously strengthening, although achieving significant growth in scale and profitability will require more time It is foreseeable that the improvement in risk management capabilities will gradually enhance our probability in the future. Regarding our overseas business segment, the Mexican market continues to deliver a rapid growth in the second quarter. The loan origination volume increased by 61% and revenue grew by 113% on a quarter-on-quarter basis. Regarding funding costs, During the quarter, our funding costs further dropped by 58 basis points compared to the first quarter due to a new record low. In May and July, we issued to AB total scale of 600 million RMB, which were oversubscribed by a great number of high-quality investors. As domestic interest rates further go down, we will engage in differentiated collaborations is more financial institutions that have complementary risk preference balancing risk and scale to enhance returns. In the second quarter, we invested 143 million RMB in research and development, further deepening the application of AI large models. In telemarketing and loan collections, the accuracy of real-time intent recognition by the large model has significantly improved. In the second quarter, the intense recognition accuracy of robots in telemarketing scenarios reached as high as 98%, and in collection scenarios, it reached 91% for code assistance applications. The AI-Large model was used by 100% of engineer staff in the second quarter, significantly enhancing the efficiency and accuracy of programmers' code writing. Due to our innovative exploration in AI-Large models, Dessin received a Technology Award from the Asian Banker in the second quarter in terms of consumer rights protection during the second quarter. We further shaped digitization of customer service, including improving standards and verification systems to quickly identify and respond to customers' issues, enhancing the consumer negotiation and communication mechanism, as well as customer service management systems, allowing frontline customer service representatives to be fully empowered to respond quickly and address customer concerns, establishing a multi-point tracking customer service process system, which includes the introduction of a series of management systems, training programs, and sales behavior tracking processes. These measures aim to enhance the customer service experience from the very beginning of the business process and data protection human rights. Moving ahead to the second half of the year, in light of the current external environment, we will continue to adhere to the prudent principles of priority risk management and focusing on the following key tasks. First, while we will ensure to bring risks level down to an industry long range, we will promote steady growth in scale. Over the first half year, we have intensified our efforts in building risk management capabilities, and risk management system and refined operational system have gradually improved. The risk of newly issued assets has returned to a healthy and reasonable level. Moving forward, we will appropriately increase our customer acquisition efforts, leverage our advantages in scenario-based operations, and gradually drive steady growth in scale. At the same time, we will continue to invest more resources into our credit line limit and pricing strategies, conducting more refined operations by segmenting products and customer groups. We are confident that profitability will gradually return to the robust level as we have achieved in the past. We will leverage the high-frequency consumption scenarios of our e-commerce business and our card, both online and offline, to enhance user stickiness and boost user activity. For the e-commerce business, we will offer a wider range of products and portfolios tailored to different users, including QT products for premium customers and highly cost-effective products for growing customer segments. For Lenoir Card, we will enhance user activity and conversion rates among premium users by implementing a differentiated management system based on customer segmentation and expanding customer acquisition across different scenarios. Additionally, we will create an exclusive benefit system to further boost overall user engagement and retention. We will actively pursue overseas market expansion. After preliminary exploration, business in Mexico is currently maintaining a rapid growth. In the future, we will closely monitor more emerging market opportunities and actively engage in exploration. We believe that as the asset structure continues to optimize and overall risk level gradually turns better in the second half of the year, our profitability will steadily improve. Next, I will hand the floor over to our CRO. Thank you.

Okay, now let me introduce the second quarter's risk situation.

Thanks, Jay. Let me give an update regarding risk performance in the second quarter.

In the second quarter, we will continue to stick to the strategic direction of risk management, and continue to expand the risk management system and risk management capabilities. By increasing the risk detection capability, the whole life cycle risk strategy system will be built, The risk monitoring and warning capability has been upgraded, and the strategic robot risk management tools have been developed quickly. New old customers and stock assets have been refined risk management, and the company's K2 new assets and full assets risk level has been gradually reduced. In the second quarter, FPD7, the new asset, fell by about 14% compared to the first quarter. In the end of the second quarter, the full amount of assets fell by about 7% compared to the beginning of the quarter. At the same time, the recovery rate has gradually increased. The 30-day recovery rate has increased by about 1.5% compared to the beginning of the quarter. It is estimated that the risk will continue to drop in the second half of the year.

In the second quarter, we continued to adhere to the strategic principle of risk management upgrade and profitability improvement, consistently enhancing our risk management system and risk management capabilities. By strengthening our risk identification capability, building a full lifecycle risk management strategy system, upgrading our risk monitoring and risk detecting capabilities, developing strategy robots, to promptly handle risk alerts and implementing refined risk management for new and existing customers, as well as existing assets. We achieved a gradual reduction in risk levels for both newly issued and the total assets in Q2. Specifically, the FPD7 rate for new assets in the second quarter decreased by approximately 13.14% compared to the first quarter. Day one delinquency rate for total assets at the end of the second quarter decreased by about 7% compared to the beginning of the quarter. And 30 days collection rate has gradually improved up by about 1.5 in absolute value from the start of the quarter. We anticipate that the downward trends in risk levels will continue in the second half of the year.

Let me elaborate on various measures we have implemented in Q2. On the data front

We have intensified the introduction of high-quality scenario-based data source and customized in-depth joint modeling. We have also phased out and replaced ineffective third-party data source, thereby laying a solid data foundation for risk management.

In terms of model system construction, we have completed the optimization and upgrade of the model of risk classification of each business. In order to continue to introduce new eco-cooperative partner data, enrich the data dimension, continue to optimize samples, and choose samples that are more similar to the current customer group to carry out additional training, while ensuring that they are fully covered by different customer groups, we also measure the ability to identify the latest customer groups. On the front of model system development,

We have completed the optimization and upgrade of risk assessment models for various business lines. First, we continued to introduce new partners with proprietary ecosystem data in reaching the underlying data dimensions. Second, we consistently optimized samples by adapting those that are more similar to our current customer base. This approach ensures sufficient coverage of different customer groups while also enhancing our ability to identify the latest customer segments. Third, we further increased application of deep learning algorithms. These measures have led to significant improvements in the performance and the stability of our models. Additionally, through more data introduction and algorithm innovation, we have upgraded and iterated various models, including profiling models, response models, and fraud detection models. As a result, both coverage and accuracy have continuously improved.

In terms of the wind control strategy system construction, the wind control system construction of the entire life cycle of all business lines has been further developed,

On the management strategy system development, we have further implemented a full life cycle risk management system across various business lines. This allows for more targeted and effective risk management to our customers at their each stage of life cycle.

On the front of risk monitoring and detecting, in the second quarter, we launched an automated asset risk inspection system from scratch.

This system can detect more segmented portfolios, promptly identify and locate change in risk trends and anomalies, respond, and finally handle them quickly.

In terms of risk customers' management, the secondary management strategy robot has enhanced the risk customers' automatic strategy retreat processing capability in all business areas and all landing applications. It can produce management strategy suggestions at a small time level,

On the front of handling high-risk customers, the disposal strategy robot has been fully implemented across various business and scenarios. This has strengthened our automated strategy capabilities for managing high-risk customers, enabling the generation of disposal strategy recommendations within hours. and improving the efficiency and accuracy of handling such high-risk assets.

In terms of risk management for new customers, the Law & Girl risk management method has been fully implemented on all new customer traffic channels. This mode is a comprehensive upgrade to the past new customer risk management methods. The new risk management mode adopts risk management with initial margin and dynamic growth, Logitech effectively controls the risk loss of the new customer for the first time. At the same time, for high-quality customers entering the new stage, we promote its scale growth through dynamic receivable pricing management, thereby increasing the ratio of high-quality assets. With the comprehensive implementation of the new customer risk management model, the receivable rate of new customers increased by about 20% compared to the first quarter. In terms of risk management for new customer assets, we have comprehensively implemented the low and the growth risk management strategy across all new customer acquisition channels.

This strategy represents a complete upgrade from our previous cash risk management approach for new customers. The low and low risk management strategy employs an initial small amount of approved credit line and dynamically managing the credit line amount across the different stage of customer life cycle, effectively controlling the risk exposure of the first time delinquency among new customers. At the same time, for high-quality customers transitioning to the next phase of lifecycle, we uplift their credit limits to promote their scale growth, thereby increasing the proportion of high-quality assets. With the comprehensive implementation of the new risk management strategy for new customers, the credit approval rate for new customers has increased by approximately 20 to 0%. compared to the first quarter. Meanwhile, the early risk indicator, SPD-7, for new customers has decreased by 23% compared to the first quarter. This lays a solid foundation for the commutation of high quality customer and sustained business growth.

In the risk management of old customers, K2 focuses on negative management, optimization of structure, and optimization of pricing in three aspects. In terms of strengthening negative management, K2 restores the negative management system of import and transaction. In the import section, risk management is carried out through the optimization of products for people of different risk levels. In the transaction section, the real-time transaction risk information is introduced and the decision is made. The K2 old customer risk is reduced by 20% compared to Q1. At the same time, the customer who does not match the risk and the amount of money is reduced. The recovery period is long and effective in helping the reduction of long-term risks. In the wind control product, the application of asset automatic inspection and risk strategy robot accelerates the prediction and management of high risk assets. In terms of optimization structure, Based on the continuous improvement of risk recognition capabilities, the increase in the price of high-quality customers is effective in promoting the increase in the price of high-quality products. In terms of risk management for new assets from existing customers, our work in Q2 focused on three key areas.

high-risk asset management, second, structural optimization, third, differentiated pricing. To strengthen high-risk asset management, we restructured the entry and the transaction stage. During the entry stage, we managed the risk through differentiated products for different risk levels. In the transaction stage, we produced real-time transaction risk information for agile decision-making resulting in a 20 to 0% decrease in risk level for existing customers compared to Q1. Additionally, we reduced credit limit for customers with mismatched credit profile and credit line amounts, reclaiming their credit exposure and effectively helping to reduce long-term risk. In terms of risk management products, The application of automated asset inspection and risk strategy robots accelerated the early alerts and disposal of media to high-risk assets. In terms of structural optimization, we increased credit limits for high-quality customers based on our enhanced risk identification capability, effectively increasing the proportion of high-quality GMV. We also intensified the re-offer efforts for customers showing signs of customer churn and those who have already stopped using our products, aiming to prevent churn and encourage return. In terms of differentiated pricing, we made an enhancement in the differentiated pricing capability across all product lines, with the take grades of each product line showing a steady increase compared to Q1.

In terms of managing the collection efficiency for existing assets, Q2, we focused on three main areas.

Increasing the coverage rate of third-party debit transfer. Second, optimizing debit transfer strategy. Third, refining pre-delinquency reminder strategies. These measures have proven effective, leading to a gradual improvement in the collection rate for existing assets.

Looking forward to the third quarter, we will continue to strengthen the recognition ability of risk management, strategic system, and intelligent wind control tools to upgrade At the same time, we will further deepen the difference in risk management ability construction between people, products, and scenarios. In terms of institutional cooperation, we will strengthen the mutual cooperation between financial institutions and partners in various types of financial institutions to ensure that the increase in assets and the level of asset risk continues to decline in the third quarter.

Looking ahead to the third quarter, we will continue to strengthen our risk identification capabilities, risk strategy systems, and intelligent risk management tool upgrades. Additionally, we will further deepen the development of differentiated risk management capabilities by segmenting based on various customer cohorts. products and scenarios. In terms of financial institution collaboration, we'll enhance partnership with various financial institutions who have different and complementary risk preference and strategies. Our goal is to ensure that the risk level of both new and existing assets continue to decline in third quarter, consistently promote the growth of high quality assets further optimize the asset structure, and gradually improve profitability. Next, I will hand over to our CFO James for financial updates.

Thank you, Alvin. I will now give a more detailed update on our financial results. Please note that all figures are presented in RMB unless otherwise stated. As Jay and Arvind mentioned, in the second quarter, the macroeconomic recovery remained sluggish. The consumer confidence continued to be at historic lows. In this context, we maintained a cautious operating strategy, controlling the pace of loan issuers and further tightening credit standards. This timely adjustment strategy not only brought us healthy financial results, but also laid a solid foundation for future growth. The strong financial performance in the second quarter can be highlighted in the following four aspects. First, significant increase in revenue take rate. This is the key highlight of the quarter. The revenue take rate of credit business rose to 2.91%, an increase of 37 basis points quarter over quarter, and 54 basis points year over year. Despite a 12% quarter-over-quarter decline and a 20.1% year-over-year decline in quarterly loan issuers, we achieved a 12.3% quarter-over-quarter and a 19.1% year-over-year revenue growth. The increase in take rate was primarily driven by record low funding costs, risk-based differentiated pricing optimization, a slight refinement in the early repayment ratio, and a continued improvement in asset quality of new loans. Alvin has detailed the downward trend in risks of new assets, and we are confident that we will see more improvement in the overall loan portfolio towards later this year. Secondly, record low funding costs and more balanced funding channels. In the second quarter, funding costs further declined to 5.26%, down 58 basis points quarter-over-quarter and 131 basis points year-over-year. This significant drop in funding costs was due to a relaxed monetary policy environment and an increased market demand for high-quality assets from our platform and efficiency improvement brought by diversified funding sources. We successfully resumed ABS issuance in May after a break of more than two years. And in July, we issued a second ABS of this year with the funding cost for senior tranche as low as 2.8%. Moving forward, we plan to issue ABS regularly to further diversify our funding sources and reduce overall funding costs. In the second quarter, we added two new financial institutions as funding partners to maintain approximately 70% of our funding from national institutions. Thirdly, small increase in risk-free new loans. New loans and the risk-free segment has a percentage of total GMB in Chinese, increased from 23% in Q1 this year and a 22.8% in Q2 of last year, to 27.2% in Q2 this year. The risk-free segment mainly consists of new loans facilitated and the risk-free profit-sharing model, as well as tech empowerment SaaS services to banking partners. Additionally, the revenue split proportion in profit-sharing model, in Chinese, increased by 1 percentage point quarter over quarter and a 4 percentage point year over year. These two increases effectively enhanced our risk-free revenue quality and helped improve probability. The increase in the share proportion was due to a growing demand for high quality assets in the financial market and the gradual improvement in our overall asset quality. This demonstrates that our risk management capabilities are increasingly recognized by our business partners. Also, as a side note, in the portion of the risk-free revenue, we are also exploring value-added services offered to our customers to improve the user experience. In the future, we plan to continue to increase the proportion of risk-free model to expand issuing volume and diversifying our business model. which in turn will better serve the needs of the financial partners with the different risk preferences. Fourth, strong recovery in e-commerce business. In the second quarter, e-commerce business revenue surged to 437 million RMB, up 88.5% quarter-over-quarter. Gross profit in the e-commerce business rebounded from a loss in the first quarter to 14 million RMB in the second quarter. The total transaction volume in the e-commerce segment increased by 3.3% quarter-over-quarter, indicating an improvement in the revenue take rate and probability. This turnaround was mainly due to the decisive measures taken in previous quarters to reduce risk levels and upgrade to tightened risk management strategies. Despite short-term disruptions in the first quarter, such as declines in transaction volume and gross profit, business growth and profitability quickly recovered and returned to the growth trajectory, a trend we expect to continue in the future. In addition to the above four operational highlights, I would like to add some details to some items on the income statement. First, on revenue. Technology-enabled services revenue grew to 535 million RMB in the second quarter, up 47.9% quarter-over-quarter, driven mainly by increased GMB in the risk-free loans, higher revenue share proportion in other services. In the second quarter, as mentioned earlier, the loan issuance and the risk-free profit split model accounted for 27% of the total loans, up 4% from the first quarter of 2024. Moving forward, we plan to continue expanding the risk-free portion of our business. Second, on cost and expense items. First, loan provision cost. There are four provision line items in our income statement, including provisions for financing receivables, contract assets and receivables, for provision for contingent guarantee liabilities and the fair value change in financial guarantee derivatives and fair value loans. Total provision cost in Q2 increased by 12.6% quarter-over-quarter due to higher risk levels in the existing loan book. However, as Arvind mentioned, during the second quarter, we saw an improving trend in the day one delinquency rate, which peaked in April and gradually came down from April to June. Additionally, the increase in the 90-day plus delinquency rate was mainly due to a quarter-over-quarter decline in the loan balance, driven by lower new originations and lapse of time. This is a mathematical calculation due to lower denominator, and a 90-plus-day delinquency ratio only serves as a lagging indicator and provides one angle to review the risk performance among an array of risk metrics. While risk profile for new loans has substantially improved, the risk for the existing loans has also been stabilized. However, the provision for the total portfolio will still have some lingering effect in the coming quarters. Second, funding costs. The all-balance sheet loan amount and the funding costs remain relatively stable due to the flat size of the trust funding. Third, processing and service costs. decreased by 11.7% quarter over quarter due to a reduction in the loan issuers and the facilitation volume in the second quarter. Fourth, sales and marketing expense increased by 12% quarter over quarter. Most of the incremental expenses were invested in the expanding overseas markets as our business in Mexico is rapidly expanding. Therefore, dividing total sales and marketing expense by the number of newly approved users shows some increase in the customer acquisition cost, while actually the unit cost of the domestic customer acquisition has to be relatively stable. Fifth, net profit margin. Despite the challenging environment in the second quarter, our net profit margin remains stable compared to the first quarter. Apart from the above income statement items, next on the balance sheet items. In the second quarter, we strengthened our strong cash position to 4.6 billion renminbi through refined operational efficiency and maintain a solid shareholders' equity of over 10 billion renminbi. Lastly, regarding the shareholders' return, as Jay mentioned, We are committed to creating sustainable value for shareholders and have announced a cash dividend of $0.072 per ADS for the first half of 2024, with a record date of September 16, 2024, equivalent to approximately 20% of the total net profit for the first half of 2024. Based on the current share price and our annualized cash dividend payout, the cash dividend yield reached about 8.7%, which we believe is in the top range among the ADR companies. Looking ahead to the third quarter, in the context of a continued uncertainty among the macroeconomic recovery, we will continue to adhere to a prudent operating principle. Based on current forecasts, which is subject to managerial updates, We expect the total loan issuance and the profit in the third quarter to remain at similar levels compared to the second quarter. That concludes the financial segment. Operator, we can now open the floor for questions.

Thank you. We will now begin the question and answer session. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please ask your questions in Chinese first and follow up with English translations. Please limit to two questions at a time, and if you have follow-up questions, please request to rejoin the queue again. Our first question comes from the line of Yada Li from CICC. Please ask your question, Yada.

Hello, management. Thank you for giving me a chance to ask a question. Today, I have two questions for the management. The first is that President Xiao just mentioned that the increase in overseas business this quarter is faster than the big game. Can you introduce some more overseas expansion situations and predict when overseas business will be able to increase in size and reach a profit level in the future? The second question is to ask the management I will do the translation. Hello, management. Thank you for taking my questions. Mr. J mentioned that the growth of the overseas business this quarter far outpaced the overall business. Could you provide more details on the overseas expansion and when we expect the overseas business to scale up in volume and make a profit? Second, the management mentioned the company continued a prudent strategy this quarter, but we noticed that sales and marketing expenses increased compared to the first quarter, which means the customer acquisition cost per active user also went up if we do the calculation. Could the management give more color on this? That's all. Thank you.

Okay, thank you. Let me answer these two questions. In the second quarter, in fact, we still took a relatively safe, in domestic business, we took a steady and safe strategy, improved the entire risk, and some standards of approval, maintaining a relatively healthy loan size. But compared to domestic business, our overseas business is indeed developing relatively quickly. Q2 is about 60.8% more than Q1, and the growth rate is 76.8%. It is far beyond the speed of growth of our entire market. Moreover, from the point of view of overseas business itself, in the past two seasons, we are still in a trend of increasing speed and high speed development. Q2's market share is two to three times that of Q1. But in fact, we also need to see that the overall scale of overseas business is still relatively small compared to the overall market. We expect to need some time to invest to expand the scale and achieve a larger scale of the entire profit. In the future, we also plan to continue to expand some of our overseas strategic investments.

Okay, I will translate for Jane. In Q2, amid the temperate macroeconomic recovery, we adopted a prudent strategy in the domestic market, further tightening our risk approval standards and maintaining a healthy controlled scale of loan ordination. Compared to our domestic market, our overseas business has developed rapidly, You see total loan ordination in Q2 grew by 60.8% and the loan balance increased by 76.8 Q1Q, far outpacing our overall business growth. Furthermore, the overseas business is accelerating growing speed quarter by quarter. The Q1Q growth in Q2 is roughly two to three times of that in Q1. However, we'd like to also point out that the scale of overseas business is still relatively small compared to our domestic business scale. We anticipate that it still will take some time and require more investment to expand and subsequently make a profit in the future for the overseas business. So looking forward, we plan to step up our investment in overseas markets and accelerate the expansion.

The second question is that we see that the entire growth of our investment cost is mostly from overseas investment. As I mentioned before, we are still in a stage of expansion and growth overseas. We need a certain amount of investment. Therefore, from the report, we can see that the sales cost has led to a false impression that the cost of single goods has increased. In fact, we are still investing more in the overall overseas. If we look at it from our own internal point of view, this quarter, the total cost of our domestic customers, the cost of single customers, compared to Q1, are all at a relatively stable level. And within our entire forecast, the previous one was also introduced, that the risk of our entire new customers is obviously better. Our new customers in China's entire Well, I will do translation for Jake. Yeah, for your question, explain in short the majority of the incremental sales and the marketing expense comes from our investing in overseas markets.

The oversea market, as you see, is still in its early stage of high growth speed, and it requires significant investment. Therefore, if you just purely do the calculation based on the financial statement, it may appear to show that the customer acquisition cost per active user went up, but that is misleading. Based on our detailed analysis, the total cost related to acquiring new customers in the domestic market And also, if we see the unit cost of customer acquisition remains relatively stable compared to Q1, and that's within our expectation. Moreover, as we continue to improve our customer acquisition efficiency in the domestic market in the future, we believe the quality of our customer code will improve and the payback period will shorten and the unit cost of customer will gradually go down. Operator, that answers the two questions of Yada. We can go ahead for the next questions. Thank you.

Our next question comes from Zoe Zhou from CLSA. Please go ahead, Zoe.

Thank you for the opportunity to ask me a question. I have two questions I would like to ask. First, James mentioned that this year's Although the amount of payments has decreased, but the income is growing. That means our take rate has also increased considerably. Can the management be able to develop the driving factors behind this and look forward to the trend of income take rate in the future? The second question is, D.O. and CFO, we have all mentioned that the capital cost of this quarter has greatly decreased. Can you introduce some specific methods to reduce the capital cost? And in the third quarter and the fourth quarter, Okay, let me do the translation. First one, as James mentioned, although the loan volume decreased this quarter, revenue increased quarter over quarter, which implies a significant rise in the revenue take rate. Could the management elaborate on the driving factor behind this and provide an outlook on the future trend of the revenue take rate? The second question, both CEO and CFO mentioned a significant reduction in funding costs this quarter. Could you elaborate on the specific measures taken to bring down funding costs and share management's outlook on the training of funding costs for the third quarter and the rest of 2024? Thank you.

Thank you, Zoe. I will answer your questions. The first question Basically, in Q2, because of the slow recovery of the macro economy, we continue to adopt a prudent strategy. Basically, the total loan origination declined by 12%, and the loan balance dropped by about 5% quarter-by-quarter. However, because of our focus on improving the operational efficiency and strengthen core capabilities, the revenue takeaway increased significantly from 2.54% in Q1 to 2.91%. Basically, it's a substantial rise of 37 basis points, quarter over quarter, and about 54 basis points if you compare year over year. This is really because of many reasons. Basically, the first one is, as Aubrey mentioned, tightened risk standards bolstered a continuous improvement in the quality of new loans this quarter. And also, secondly, a significant reduction in the funding cost. And thirdly, some further optimizations of early repayment ratio, a risk-based differentiated pricing, and more value-added services. Looking ahead into the third quarter, we will continue to uphold the prudent operational strategy, and we expect the revenue take rate to maintain a slight uptick momentum in the near future. As for the second question related to funding cost, basically this quarter the funding cost reached a new record low, stood at about the 5.26%. It decreased by 58 basis points, quarter over quarter. It is really a big reduction. Really, this is driven by many factors. The first is the overall liquidity in the market. It remains relatively ample, and our current assets are in high demand among the funding partners. So this reflects our continuously improving asset quality has gained more recognition from funding partners. Really, this helps us to drive down the funding cost. Secondly, as for our profit sharing model, the revenue split ratio increased by one percentage point quarter over quarter and a four percentage point year over year. Again, this demonstrates the competitiveness of our assets and our strong bargaining power, if you will. And the third point is the continuous ABS issuers. As Jay and I both talked about in our script, we issued two tranches of ABS with the senior tranche as low as 2.8%. This really significantly pour down our funding cost. And we plan to regulate issue ABS to further balance and diversify our funding channels. And in terms of funding structure in Q2, we added two more funding partners to our existing 160 partners network. So with the proportional funds from national funding partners maintaining at about 70% also. So looking ahead, With the acceleration pace of the ABS assurance and continuous improvement in asset quality, if the overall liquidity remains sufficient in the financial market, we believe there is still considerable room for further reduction in funding costs in the near future. So hopefully this answers your questions.

Thank you. Okay. Our next question comes from the line of Alex Yeh from UBS. Please ask your question, Alex.

Hello, Ms. Guan. Thank you for the opportunity to ask a question. The two questions here are probably related to asset quality. The first is, with the increase in asset risk, there is also a gradual decline. When can this be reflected in our improvement at the profit level? As we can see, there has been a significant increase in revenue in this quarter. However, it is also mainly due to the sale of the total amount of loans. The second question is about the indicator of assets. For example, the expected rate of 90 days is now from 3.03 to 3.7. When can we see a turning point? And we also see the new Vintage Curve, the Vintage Curve added by DPD 30 days. So I have two questions on asset quality. First is on So after we have seen some early signs of ethical improvement in both new loans and the overall portfolios, when do we expect this improvement to be reflected in the bottom line more meaningfully in the future? And second question is regarding some of the risk indicators. For example, number one, the 90 days plus MPR ratio has continuing to edge up to 3.7% in Q2. So I'm wondering when do we expect to see this ticking. And then also on the day past due 30-day vintage curve, we have noted the Q1 curve still following the similar trajectory of the past few quarters. I'm wondering when do we see an improvement to that. Thank you.

Next, I will answer these two questions. In terms of risk management, we still continue to store risk identification, then wind control system, wind control intelligent wind, risk structure construction, and this kind of risk warning monitoring. A continuous upgrade to improve our risk management capabilities. Through continuous improvement of risk management capabilities, Well, I will translate for Arvin. As we continue to enhance risk management upgrading, we'll further strengthen the risk identification capability

advance the construction of comprehensive lifecycle risk management strategy system, improve risk monitoring and early alerting capability, and develop intelligent risk tools, such as we mentioned before, the strategy robots. We will continuously enhance the refined risk management for both new and existing customers, as well as the existing assets. So based on the above-mentioned measures undertaken, We anticipate that the proportion of new loans will gradually increase and the risk level of the existing assets will gradually come down, leading to a gradual improvement in profitability in the future. We expect this to show as a gradual quarterly improvement over time.

This is about the rise in the green interest rate of 90 plus. And then here is a... Thank you. FPD7 and FPD7 and FPD7 and Although we have achieved a gradual decline in new assets and existing assets in Q2, but this risk improvement is reflected in the improvement of the 90 plus unfavorable rate. It still takes some time. The second is the increase in the second quarter of the 90 plus unfavorable rate. There are also some technical reasons. In the second quarter, we actively control the scale of the balance and adjust the risk control. Then, on this basis, the balance sheet has dropped. The balance sheet is the share of our 90 balance sheets. The decrease of the share will also lead to a rise in the bad rate of the 90 balance sheets. As we gradually improve our new assets in the entire preliminary and preliminary risk indicator, the second quarter fell by about 14% compared to the first quarter, and the inflow rate of all assets I will translate for Arvind.

As you mentioned, the 90-day delinquency rate is more like a lagging indicator. We strongly suggest that the market pay more attention to those leading risk indicators that we actually monitor in the daily work of our risk management space. For example, let me mention a few of them. They have PD7 for new issued assets. In Q2, we see it dropped by approximately 14% compared to Q1. The second lead indicator will be day one delinquency rate for the total assets. UCN is dropped about 7% from the peak time in April to June in the second quarter. The third lead indicator we recommend to witness the M1 collection rate, which gradually improved about approximately 1.5. That's in absolute value from April to June. So all the risk improvements in the new issue assets will gradually show in the 90 days, gradually by time. It will require some time until we see the improvements in the 90 days delinquency rate. Second point I'd like to explain from the mathematic calculation perspective to elaborate the increase of 90 days delinquency rate is the 90 day delinquency rate The denominator is the loan balance. As we mentioned, we actively restrained our loan ordination in Q2, not resulting in a decrease in loan balance. So there is a drop in the denominator when we calculate 90 days delinquency. It naturally leads to a rise in the 90 days delinquency rate. As all the upgrades in the risk management work continues, we expect to see the downward trend when the risk level will continue in the second half of the year. Well, Alex, hope that address your question regarding the risk management space. Operator, I think if there's no more questions on the line, I think we can close the call.

Thank you. I'm sharing no further questions. I'll now turn the conference back to the management team for closing comments.

Well, thank you. Again, everyone for joining us today. If you have further questions, please feel free to contact us via the contact information on our IR website. Thank you all. Have a good day and good night.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.