LexinFintech Holdings Ltd.

Good day and thank you for standing by. Welcome to Le Shing FinTech third 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 need to press star 11 on your telephone. You'll then hear the automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the call over to your first speaker today, Ms. Mandy Tong. Thank you. Please go ahead.

Thank you, Desmond. Good morning and good evening, everyone. Welcome to Le Xin's Third Quarter 2024, Earthings 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 Chung. 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 business outlooks 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. Last, 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 statements in more detail. I will now turn the call over to Jay. Please kindly note, in today's agenda, Jay will give his whole remarks in Chinese. Then the English version will be delivered via J's AI-based voice. J, go ahead, please.

Hello, everyone. I am very happy to share with you our business plan for the third quarter of 2021. In the third quarter, we insist on both risks and data, adopt a stable business strategy, reduce the risk of bankruptcy, and improve the asset structure. As new assets with low risk continue to enter, The overall structure of the company's assets is gradually improving. The trade volume of the third quarter is 5.1 billion yuan. The management revenue is 1,112.5 billion yuan. The revenue is 36.6 billion yuan. The net profit is 3.1 billion yuan. The revenue and profit will return to the stable growth channel. As the overall assets basically continue to improve, it is expected that the revenue and profit will continue to improve. The performance of the third quarter has two main highlights. First, The continuous risk system construction shows the effect. In the quarter, the new asset continues to improve. The large-scale asset risk has come to a turning point. The new asset early risk indicator FPDT fell by about 13%. The full asset return rate fell by about 9% compared to the second quarter. In the third quarter, the company focused on increasing the added value of high-quality assets. The low-end growth strategy fell completely. The optimization of the focus channel hair, the increase in the number of target customers, the deep digging of the company's past demand for more than 200 million potential customers, and the targeted implementation of re-alpha. Accelerate the delivery of high-quality and pure customers, introduce three-way data, and create a risk model dedicated to small and micro customers. The targeted and high-quality small and micro customers' precision recognition ability exceeds 10%. At the same time, upgrade the self-reliant anti-crime model, effectively locate and timely intercept suspicious fraud behavior. The platform's anti-fraud capability has been further improved. As the added asset quality continues to improve, the company's large-scale risk continues to decline, and the improvement of next year's performance has established a good foundation. The second bright point is to continue to promote detailed operation, adjust the capital asset ratio model, and the company's profit and loss capability steadily increases. In the third quarter, the profit and loss ratio increased by 8.45% to 223 BP. In the third quarter, with the decline of large-scale risks, the quality of assets continues to improve. Our assets are welcomed by more financial institutions. The financial structure is more diverse and healthy, leading to a continuous decline in financial costs. Compared to the second quarter, 98 BP has been reduced, creating a new low in history. In the third quarter, the company focuses on young customers. By optimizing products to match the needs of young customers, For the benefit of small and medium-sized customers, increase the operating capacity of big and medium-sized customers, widen the customer channel, and optimize the price-to-price reduction, reserve, power outage, etc. strategy, and introduce exclusive small and medium-sized business funds. In this quarter, the exchange rate of medium-sized customers increased by 78%, and the second is for the benefit of the community of high-quality workers. From the pricing strategy of Golan Le Jin Card, through the activity of the price, profit, and other means to stimulate the activity of customers, In the third quarter, the company based on the new accurate customer division, adjusted the capital asset ratio model, and launched the digital distribution platform. The digital distribution platform is a clear asset division model. The company does not bear capital risk losses, but through traffic distribution to earn technology service income. After the model is launched, we can effectively The growth of the performance of the company is inseparable from the continuous investment of technology and research. The company's research and research investment in the third quarter is 1.49 billion yuan. Continuous competition to build a leading industry. Management and management fully expose the movement of the operating system. Quickly capture the movement of business and operation indicators. Automatic output and volume of movement reasons. In the system, the system covers about 400 core business indicators in the business line. Accordingly, from the traditional artificial model of the number of weeks to the number of hours, or even minutes, to assist the business and management of the intelligent decision-making, the accuracy of the actual intention of the AI large model is further improved. In post-management scenarios, the accuracy rate is increased by 17% compared to the external color. Effective assistance businesses reduce costs and increase efficiency. In the field of consumer rights protection, which we have always paid special attention to, the third phase continues to improve the consumer consultation communication mechanism and customer service management system. Increase the digitalization and systematization of customer service, including the analysis system to improve the problem, launch a first-tier customer service authorization system, optimize customer service processes, and greatly improve customer service processing efficiency. deep-dive into a wide range of customer service data, analyze and respond to customer experience, improve the dynamic capacity and resolution of first-line customer service issues, strengthen business coordination, improve the insurance review mechanism, identify and solve insurance issues as soon as possible, and fully protect consumer rights. In the future, we will continue to follow the business principle of audit, promote risk, continue to decline, improve the profitability of assets, It is time to increase the supply and demand force to promote steady growth in business scale. As new assets are added, the proportion of new and high-quality assets is gradually increasing, and the amount of assets is gradually decreasing. It is expected that the overall risk will continue to improve rapidly. We are full of confidence in the increase in profit next year. To further return to shareholders, from the beginning of 2025, our share price ratio will increase from 20% of the current profit margin to 25%. Good morning and good evening, everyone.

It is my pleasure to share with you our performance for the third quarter of 2024. In the third quarter, we remain committed to a prudent and steady operational strategy driven by risk management upgrade and deep data analytics. This approach has allowed us to reduce our overall portfolio's risk and improve our asset quality. As low-risk new loans continue to grow, our overall asset structure is gradually improving. In the third quarter, loan originations reached 51 billion RMB. Outstanding loan balance stood at 111.3 billion RMB. Revenue was 3.7 billion RMB, and net profit was 310 billion RMB. with both revenue and net profit returning to a steady growth trajectory. As the fundamentals of our portfolio continue to strengthen, we expect to see further improvements in the company's revenue and net profit in the future. Our performance in the third quarter includes the following two highlights. First, our ongoing efforts in risk management have yielded tangible results. with continued improvement in new asset quality and a turning point in overall portfolio risk. The leading risk indicator, FPD7, of new loans decreased by about 13% compared to the second quarter, and day one delinquency ratio of the overall portfolio declined by around 9% compared to the previous quarter. During the quarter, we focused on expanding high-quality new loans by fully implementing the low and growth strategy on various business lines, supported by the following measures. We strengthened our reach and acquisition of target customer markets by optimizing QIU Online advertising channels, leveraging our cumulative user base of over 200 million registered users We explored their potential borrowing demands and conducted targeted reoffer to reactivate dormant high-quality customers. We brought in multiple third-party data sources and developed a dedicated risk model for small and micro-business loans. This increased the credit identification accuracy for small and micro-business assets by over 10%. Additionally, we operated our intelligent anti-fraud model, enabling us to more effectively detect and properly intercept potential fraud, further strengthening our anti-fraud capabilities. As the quality of new loans continues to improve, we expect overall portfolio risk to decline, laying a solid foundation for performance growth next year. The second highlight is our improved profitability. Driven by a continued focus on refining operations and optimizing funds and asset matching, in the third quarter, our net profit margin reached 8.45%, representing a quarter-over-quarter increase of 223 basis points due to the declined risk levels of overall portfolios and enhanced asset quality. Our assets got increasing recognition from various financial institutions. leading to a more diverse and healthy funding net. This drove down our funding costs by 98 basis points from the second quarter, setting a new historical low. In the third quarter, we focused on meeting the diverse demands of younger customers through a range of products. For high quality, small and micro business owners segment, we enhanced the operations of product, which means working capital loan and expand our acquisition channels, we operated and optimized the strategies related to credit line, granting and pricing adjustments, customer retention and dropout prevention, et cetera. We also connected to dedicated funding channels specifically for small and micro business loans. As a result, Le Zou Zhuan achieved a 78% increase in transaction volume quarter over quarter for the super prime salary worker segment, we restructured the pricing strategy for LegendCard and implemented various measures, including credit line and pricing adjustment to boost customer borrowing activities. With overall risk level remaining stable, the number of drawdown customers increased by 24% compared to the previous quarter. based on our new risk-based customer segmentation. We adjusted our fund and asset matching model and launched a new product, the Intelligent Credit Platform. The Intelligent Credit Platform operates under a light asset profit-sharing model in which the company bears no risk of principal loss and generates technology service revenue to traffic distribution. Through this model, we can direct various customer segments to funding partners that have complementary risk appetites from us. This approach enables us to reduce customer acquisition costs, broaden our customer base, and increase revenue. Stable business growth is underpinned by continuous investment in technology and research and development. In the third quarter, We invested 149 million RMB in research and development to reinforce our industry-leading capabilities. Business management is comprehensively connected to the anomaly attribution system, which enables real-time detection of fluctuations in business and operational metrics and automatically generating quantitative insights. In the quarter, the system has covered about 400 key business metrics. Time required for anomaly attribution has been reduced to within a few hours or even minutes compared to previous time requirement of a few weeks under the traditional manual model, empowering smart business and management decision-making. The accuracy of our proprietary AI model in intent recognition has further improved in post-loan management scenarios, its accuracy is 17% higher than that of external solutions, which help to reduce costs and enhance operational efficiency. With regard to consumer rights protection, a longstanding priority for us, we have continued to enhance our customer communication and service management processes. and strengthen digitalization and system development of customer services in the third quarter. Key initiatives included defining our issue grading system, introducing a frontline service authorization protocol, and optimizing customer service workflows. These measures have significantly improved service handling efficiency, leveraging the customer service data from our platform, We analyzed and identified the root causes of customer experience challenges and empowered our frontline teams with enhanced skills in issue identification and resolution, strengthening collaboration with business units to improve the consumer rights protection review mechanism in order to identify and address consumer rights protection issues at an earlier stage. Looking ahead, we remain committed to a prudent operational approach focused on bringing down risk level of overall loans and enhancing profitability. Also, we will properly intensify our customer acquisition efforts and push for steady growth in business scale. As the proportion of high-quality new loans increases and existing loans mature gradually, we expect to see continued accelerated improvement in the asset quality of overall loan book we remain in full confidence in our ability to deliver stronger probability in the coming year. To further reward our shareholders, we plan to raise our dividend payout ratio from the current 20% of net profit to 25% starting in 2025. Now, I would like to hand the floor over to our CRO. Thank you.

In the third quarter, we will continue to control the strategic direction of the risk and profit, focus on increasing the asset value, continue to improve the efficiency and accuracy of the negative trend, strengthen the online anti-fraud capability, upgrade and improve the three-way data management system, and increase the actual handover and control capability. The forward-looking risk indicator increases the level of asset and total asset risk. In the third quarter, This is translation of CRO's remarks. In the third quarter, we continue to adhere to the strategy of tight and free standard and profitability enhancement.

focused on generating more high-quality assets and improved the accuracy and efficiency of high-risk asset control. We also upgraded the real-time anti-fraud detection capability, further refined the third-party data management system, and built a real-time interactive risk management capability. Leading risk indicators for new assets and the overall assets continue the downward trend from the previous quarter. FPD7 of new assets decreased by about 13% compared to the second quarter, and the overall asset day one delinquency rate decreased by about 9% compared to the second quarter. We expect the Star Wars trend of leading risk indicators will continue in the fourth quarter.

To be more specific, in terms of new customers and new risk management, we have achieved significant progress in both external headwind optimization and low-cost mining. In terms of new customers, we focus on the focus on the high-risk channels to accelerate the withdrawal of long-term high-risk channels. At the same time, the new customer risk management recognition capability and risk strategy continue to be upgraded, and the new customer risk continues to decline. Compared with the second quarter, the new customer risk decreased by 100%. In the third quarter of 2024, the FPD-7, the FPD-7, the FPD-7, the FPD-7, the FPD-7, the FPD-7, the FPD-7, the FPD-7, the FPD-7, the FPD-7,

Specifically, in terms of risk management for new assets from new customers, we have made significant progress in both new customer acquisition through online advertising channels and activating dormant customers on Dexin's existing user base. In terms of new customer acquisition through online advertising channels, we have focused on key high-quality channels and accelerating phasing out long-tail high-risk channels. Meanwhile, we have continuously strengthened our risk identification capabilities and upgraded risk strategies for new customers, resulting in a stable decline in the risk level of new customers acquired through online advertising channels. Compared to the second quarter, the risk level of new customers acquired through this channel has decreased by 10%. By the end of the third quarter, leading indicators FPD7 for new customers have significantly decreased by about 50% compared to its peak in Q4 last year. Currently, the risk level of new customers acquired through online advertising channels has generally declined to a reasonable range.

In terms of the internal fast-fire transformation of SYNC, we have deeply excavated the potential customer needs of more than 200 million companies in the past. Fully utilize the historical customer size advantage of Lexin. By strengthening the risk recognition ability and improving the risk strategy system, identify high-quality users. Re-offer in a targeted manner. Cooperation, operation, direction, contact, recall. Revive high-quality, shallow customers and long-term loss customers. In the third quarter, our internal revenue increase motivation customer number has achieved an increase of nearly three times compared to the second quarter. The order rate will In terms of reactivation and conversion of Zoman customers, we have deeply explored their borrowing needs.

of over 200 million customers on Le Xin's existing user base. To fully leverage Le Xin's large customer base advantage, we have strengthened our RIS identification capabilities and improved our RIS strategy system to identify high-quality users. Through targeted reoffers and coordination with our operational team, we have precisely reached and reactivated high-quality dormant customers with potential borrowing demand. In the third quarter, the number of reactivating dormant customers nearly doubled compared to the second quarter, with the credit drawdown rate of approved customers increasing by 47% comparatively in the AB test. Moreover, the customer acquisition cost of reactivated domain customers is low, and the risk level is about 20% lower than that of new customers acquired through online advertising channels. In the fourth quarter, we will continue to intensify efforts to reactivate and convert existing customers in order to sustain the growth of new customers at low cost and low risk.

On the front of new loans from existing customers, in the third quarter, we focus on three major projects, management of high-risk assets,

portfolio structure optimization, and tailor risk management for different customer segments.

In terms of negative management, we continue to strengthen the negative management and risk barrier, and further upgrade the seven major risk detection and prevention capabilities. Through the in-depth application of the negative management strategy robot, we continue to speed up the warning and management of risk customers.

In terms of managing high-risk assets, we strengthened control measures of alerted high-risk transactions and further upgraded our anti-fraud detection capabilities. The extensive use of risk-tested JDG robots enable us to accelerate the early alerting and disposal of medium to high-risk assets.

In terms of portfolio structure optimization, we continuously improve the proportion of high-quality assets

by optimizing various elements of our financial products. By continuously growing the volume of high quality assets, we further enhance a stable decline trend in risk levels. The proportion of prime and super prime assets in newly issued loans to existing customers and new customers has exceeded 75%.

In terms of the risk management of customer group differentiation, our third quarter focused on optimizing the risk management of micro-customer groups. Through the exclusive hair model, micro-customer data introduces micro-customer specialized risk identification model to strengthen the risk management ability of micro-customer customers, improve the satisfaction and reduce the risk of micro-customer customers.

In terms of Taylor risk management for different customer segments, we focused on optimizing risk management of micro and small business customers in the third quarter. Through a dedicated acquisition model, the introduction of micro and small business operational data, and a specialized risk identification model for micro and small business owners, we have strengthened our ability to manage the risk level of micro and small customers' loans. This has also improved the user experience to micro and small business owner customers with our offers and reduced the risk associated with these customers.

In terms of data management capabilities, we have established a three-way data management platform for the whole life cycle. The data will be introduced into the performance evaluation, and the features will be extended. Performance monitoring and offline evaluation will be integrated into a management platform, which greatly improves the management efficiency and management standardization and automation capabilities of three-way data. In terms of data management capability,

We have established a full lifecycle management platform for third-party data, integrating data onboarding, data performance evaluation, feature derivation, performance monitoring, and decommissioning evaluation into a single management platform. This has significantly improved efficiency, as well as the standardization and optimization of data management. Also, we have established data linkage enabling real-time monitoring, automatic alerting, and coordinated handling across the entire chain of data, features, models, and strategies. This greatly improves the effectiveness of data applications and enhances the efficiency of commissioning ineffective or inefficient third-party data.

This quarter, we will continue to strengthen the risk management, recognition ability, risk decision-making ability, risk pricing ability, reduce bad molecules, promote high-quality share growth, further optimize the health of the asset structure, and at the same time continue to improve the risk evaluation performance and stability of each business, and land the amount and interest rate smart decision-making tools. Increase the efficiency and accuracy of risk management, ensure that the risk remains in the downward trend, and the profit continues to improve. At the same time, accelerate the development of the risk management model based on the different customer risk layers, improve the scale of the green asset model, and reduce the impact of the risk cycle on profit volatility.

Looking ahead into the fourth quarter, we will continue to strengthen our capabilities of risk management, credit identification, risk decision-making, and risk-based pricing. Our goal is to reduce the proportion of delinquent assets and increase the generation of high-quality assets, further optimizing the health of our asset structure. At the same time, we will continue to enhance the performance and stability of risk scoring across all business lines and implement intelligent decision-making tools for credit lines and pricing to improve the efficiency and accuracy of our risk management. Through these efforts, we aim to ensure that the risk levels of total assets continue to decline and profitability continues to improve. In the meantime, we will accelerate the development of risk-sharing models among the new risk-based customer segmentation, increase the proportion of our capital-light business, and smooth the impacts of credit cycles on our profitability.

This is James. Now it's my turn. Thank you, Arvind. I will now give a more detailed update on our financial results. noting that all figures are presented in RMB unless stated otherwise. During the past quarter, we adhered to our principles of prudent operation and continued the upgrading of our risk management capabilities and the transformation of overall business. Our efforts yielded satisfying results, evidenced by stable loan origination volume and a strong Total revenue amounted to approximately 3.7 billion renminbi, remaining steady compared to Q2. Net profit showed a significant growth, increasing by 36.7 percent quarter-over-quarter to reach 310 billion renminbi. Here are three key highlights explaining our robust financial performance. First, substantial profit increase driven by higher revenue take rate. The sharp increase in net profit was primarily driven by higher take rate, which reached a record high of 3.25%, up by 35 basis points from 2.91% of Q2, and 81 basis points from 2.44% of the same quarter last year. The take rate calculation is derived by adding credit-oriented income, and tech empowerment income, subtracting funding costs and various provisions, then dividing by new loan origination volumes for the quarter. A few core drivers supported this increase, including the following. One, the continued improvement in the risk level of new loans in Q3, evidenced by FPD7, which decreased by about 13 percent from Q2. Two, a new record low in funding cost of 4.28 percent, which fell by nearly 100 basis points from Q2 of 5.26 percent and 6.36 percent of the same quarter a year ago. We achieved this through ample funding and the partnerships with cost-efficient national financial institutions. It also underscores the increasing confidence of our funding partners in our assets. Three, continued optimization of user loan early payoff ratio and the revenue from some value added preferable services. Second key highlight is improved asset quality. The asset quality of our total loan book improved in Q3. Total provision costs, the four lines in our income statement, including provisions for financing receivables, contract assets and receivables, provision for contingent guaranteed liability and fair value change in our financial guaranteed derivatives and fair value loans, decreased by 21 million to 1.6 billion ruby from Q2. The day-one delinquency rate of total portfolios increased by 9% compared to Q2, thanks to our ongoing business transformation initiatives, especially in the risk management upgrading project. As we are gradually facing out higher risk existing loans and generate better quality new loans, we believe the peak risk level of our total portfolio is behind us. The third key highlight is the enhanced efficiency in customer acquisition. In Q3, we improved customer acquisition efficiency through two major channels. One, reactivating Dolben customers from our over 200 million accumulated registered user base and iterating the RTA model in online advertising channels. New users with approved credit lines increased to 756,000, up by 44% from Q2. However, the acquisition cost for new users with approved credit lines dropped by 35% compared to Q2. Moving forward, we will continue leveraging our large user base to reactivate more high-quality users at relatively low cost. To summarize the aforementioned operational highlights, despite the macro environment and the stable new loan volumes in Q3, we have achieved strong sequential profit growth through healthy and sustainable improvement in revenue take rate, assisted by improved asset quality, lower funding costs, and the optimization of overall business operations, including user acquisition efficiency. Next, I'm going to provide some more detailed overview and explanation of financial statement items. First, on the revenue side. The credit facilitation and service income increased by 11.3 percent quarter over quarter, mainly driven by the higher facilitation volume growth and higher take rate in off-balance sheet loans facilitated. offsetting the lower volume in all value sheet load. Tech empowered service income fell by 28.2% to 384 million RMB quarter over quarter due to the product mix upgrade in Q3. As Jay mentioned, although the newly launched Capital Light ICP platform is still in its early stage, We are confident in its future market demand and future volume growth. E-commerce business revenues have dropped by 29.5 percent quarter-over-quarter due to the higher base of GMV in Q2 from the 618 shopping festival. We expect e-commerce business lines back to the growth trajectory in Q4. Next, on the cost and expense items. Processing and servicing costs increased by 16.1 percent quarter-by-quarter due to intensified loan collection efforts. Sales and marketing expenses dropped by 6.3 percent to 438 million renminbi in Q3 as we focused on reactivating dormant users using spending on online advertising business. G&A expenses decreased by 11.4 percent quarter-over-quarter due to cost efficiency initiatives. As a summary of the above, the net income improved by $83 million, or 36.7% quarter-over-quarter. The overall net profit margin improved from 6.2% in Q2 to 8.5% in Q3. This is primarily driven by higher revenue from the flat quarterly low volume, lower credit cost, lower operating cost, partially offset by the increasing processing and servicing cost due to collection, and the minor losses related to the e-commerce spends quarter over quarter. This breakdown analysis underscores the healthy profit improvement made in the loan facilitation business despite a flat quarterly loan volume growth. Here is another way to look at the profitability improvement. If we use net income to divide by current quarter GMV, we get the ratio of 0.61% in comparison with 0.1%. 4.4% in Q2. Similarly, if we measure the net income against the average loan balance, it is 1.09% in Q3 versus 0.77% in Q2. For balance sheet items, in Q3, our total cash position was approximately 4 billion RMB. impacted temporarily by the maturity of some trust products. We maintain solid shareholders' equity of over 10 billion renminbi. Our provision coverage ratio remained sufficiently at approximately 240% at the end of Q3. As Jay mentioned, we are committed to sustainable value creations for shareholders. The Board has approved an amended dividend payout policy increasing the payout ratio to 25% of total net profits starting January 1st, 2025. We may further increase this ratio as profitability improves in the future. Looking ahead, with the government economic stimulus package gradually take effect and the continued transformation of our business, we expect net profit to grow at considerable rate on the year-over-year basis for 2025. Although the profit recovery process may take a bit time, Q3 has already marked a strong start. For Q4, we still remain patient with the macroeconomic conditions and will continue to adhere to prudent operating principles to lay a solid foundation for growth and profitability next year. Based on our current estimates, we expect the GMV of loan originations in Q4 to grow at flat to a lower single-digit rate on a quarter-over-quarter basis. This concludes my portion of the prepared remarks. Operator, we are now open for 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 a name to be announced. To cancel your request, please press star 11 again. Please limit your questions to two questions. If you would like to ask the questions in management in Chinese, please immediately translate the questions in English. Please stand by for the first question. Our first questions will come from the line of Yada Li from CICC. Please go ahead.

Then I will do the translation. Hello, management. Congrats to the exciting results, and thanks for taking my questions. My first one is, what's management view on the growth strategy for the fourth quarter following the rollout of government policies during this at the end of September? And can we see signs of the consumer loans demand recovery based on the current operational data? And secondly, what's the core drivers for the significant net profit growth this quarter? And will this growing momentum of net profit continue in the following quarters? Thank you very much.

Okay, I'll answer the first question. After the entire government launched its policy policy in September, We have seen some changes in some short-term needs, but can this change in the future last longer? We think it still depends on some basic conditions of the entire economic trend in the future. From the current situation of Q4, the overall share price is about the same as last quarter. It may grow slightly, but this is because we have continued a stable business strategy. We still put the focus on controlling asset quality, especially controlling tail assets. Therefore, it seems that Q4 has not seen a large-scale growth. Although there is a slight growth in the overall balance sheet, but in terms of asset structure, we are continuously optimizing. Our quality customers are growing, and we can see that the quality needs are constantly recovering and improving. At the same time, we are also actively promoting the growth of high-quality scale and continuously increasing the proportion of high-quality assets to improve the overall quality of the entire asset. At the same time, we have recently updated a series of strategies that can be tied up and have achieved positive results. We can see that in fact, we have recently tied up a whole customer strategy and laid down a better foundation for our entire customer and growth next year.

Hi, Yala. This is Mandy. Let me translate for Jay. Well, since the government rolled out the economic stimulus measures at the end of September, we did observe some positive change in the short-term demand. However, whether it will turn into a long-term sustainable recovery still depends on the ongoing improvement in the macroeconomic environment in the future. So based on the quarter-to-date Q4 operational data, we see that total volume long-ordination is generally flattish compared to the same period in Q3. We think this is due to our continued prudent operational strategy. We focus on maintaining asset quality, especially control the higher risk parts. Therefore, there hasn't been a significant growth in the overall long-ordination volume. Well, although the total volume remains roughly at the same level, There has been a continuous optimization in our asset structure. We have seen a slight increase of the high quality customer with consistent recovery and enhancement in the high quality demand. At the same time, we are actively promoting the growth of high quality assets, continuing to increase the portion of high quality assets and improve overall asset quality. Additionally, Our recent upgrades in the customer acquisition strategy have proved to be effective, so we are actively deploying for the growth of new customers we think which would lay a solid foundation for growth next year.

Okay, this is James. Let me ask you a second question. Basically, the second question is give me more details in terms of a net profit for this quarter and also the forecast for next. In Q3, the net profit reached approximately about 310 million RMB. It is a very significant quarter growth of 36.7%. Really, the growth is attributed to the company's continued focus on strengthening our core competencies, especially in risk management, the continuous optimization of overall operations over the past two years. Specifically, really, two drivers. The first one is the improvement in asset quality, as both Jay and Simon mentioned a few times. Basically, we're benefiting from the 3D focus on the risk management overall upgrade. New asset quality continues to optimize in Q3. The overall quality in Q3, actually, in terms of asset quality, it really reached a turning point. beginning to stabilize and recover as the batch of loans with higher risks that we issued in second half of last year gradually mature. So based on our preliminary estimate, we would expect a considerable growth in net profit next year on the year-over-year basis. Obviously, as you know, we're going to provide guidance for next year after we report our Q4 numbers. In this quarter, the FPD7 for the new assets decreased by approximately 13% quarter-over-quarter, and the daily delinquency rate for the total assets decreased by about 9% in comparison with the second quarter. We would expect this downward trend of risk level continue in fourth quarter and into next year as well. So basically, that's the first driver in the profit improvement. The second driver really is the record low funding cost. It's really driven by the ample market liquidity and a strong demand for the high-quality consumer credit assets. The funding cost continues to drive in Q3. It's about 100 basis points lower than Q4, marking our largest quarterly optimization in the past couple of years. I can dive a little bit more into the details, basically looking at the financial statement perspective. If you look at the pre-tax profit increased by $95 million quarter-by-quarter, obviously, if you look at the specifics, there are pluses and minuses here. If we look at the plus side, excluding the e-commerce revenue, there is an increased revenue related to the loan business in the amount of about 150 million. And also, there's a reduction in the total risk provisions and contributing to about 20 million renminbi to the net profit, quote, unquote. Obviously, the minus side include the decreased e-commerce gross profit by about 30 million in Q3. And also, there's increased processing and servicing costs for collections and OPACs of about 50 million. So if we net both the plus and minus sides together, it contributed to an increased pre-tax profit of about 108 million. And this lead to the net income increase of about 83 million, quarter over quarter. A record quarter over quarter growth of about 37%. Again, we are happy with the result in Q3, and we expect a better profit increase for next year, which will provide more detailed guidance after report Q4. Hopefully this answers your question.

Thank you for the question. Our next question comes from Zhou Yi Zhou from CLSA. Please go ahead.

Thank you for giving me the opportunity to ask this question. I have two questions I would like to ask. The first one is that the manager mentioned that the season of adding and releasing funds continues to achieve risk optimization. The overall asset value is also improved compared to Q2. Can you talk about the main measures of risk level of Q3 optimization, adding and releasing funds, and the future overall asset value recovery process expectations? Let me do the translation. The first question, management mentioned that the risk level of new loan has been continuously optimized quarter over quarter. And overall asset quality has also improved compared to Q2. Could you elaborate on the main measures taken in Q3 to optimize the risk level of new loans and provide an outlook on the expected progress of the overall asset quality recovery in the future? And the second question is about the newly launched intelligent credit platform model. Could you elaborate more on the future plan on this new business line? and its impact on the company business scale and profitability.

Thank you. Let me answer the third question. In Q3, in terms of overall risk management, risk identification, risk decision-making, risk pricing, and risk management model, we have continued to build and continue to improve and optimize. Specifically, in terms of new payments, we continue to focus on to focus on high-risk channels and ensure the quality of the flow of customers. At the same time, we continue to adapt and optimize the flow model to improve the quality of the incoming customers, and then bring about an improvement in the pass rate and risk. The second aspect is to expand the construction of risk detection capabilities by introducing to improve three-party data and to work with the flow side for joint modeling, and then to enhance our ability to identify risk customers, and at the same time to strengthen the barrier between online fraud risk and high-risk multi-customer customers, which leads to a decrease in risk. At the same time, we use the new Law & Growth risk management logic in the risk management strategy of our new customers to reduce The initial risk of the client led to a continual drop in the risk of our entire risk in the new class. Compared to the second quarter, we have dropped by 110% in the risk of the new class. By the end of the third quarter, we are in the new class. The simple risk index F7G7 compared to last year's fourth quarter. When the risk is higher, the total decline reaches more than 50%. Through this continuous delay and optimization, there is a very healthy foundation for our future acquisition and risk management of new customers, and for our future growth, we can accumulate more high-quality customers. In addition, regarding the recovery of the overall asset risk level, as we just reported, compared to the second quarter of Q3, the Q3 full asset rate continued to fall by about 109%. We estimate that in the fourth quarter, it will continue to maintain a downward trend. With the gradual downfall of high-risk assets and the increase in high-quality assets, We will continue to strengthen the control work and continue to upgrade. We are committed to continuous optimization of the asset system. Through the reduction of malnutrition, the production of molecules, and the promotion of the growth of mothers and children, in the next 25 years, through the improvement and optimization of risk, continue to drive the increase in profitability.

Hi Zoe, let me translate for Arvin. So in Q3, regarding the key areas in risk management space, we primarily focus on improving several efforts, one, risk identification, two, risk decision making, three, risk pricing, four, different risk-bearing model, Firstly, for the new customer acquired through the online advertising channels, we put efforts in below four measures. Number one, we focused on the high-quality channels and accelerated the phasing out of long-tail high-risk channels. Secondly, we put efforts to build a joint model with the leading platforms with the narrow data. Number three, we enhanced our anti-fraud detection capability. Number four, we expand our low and grow strategy to the old business line. As a result, we have continuously strengthened our risk identification, capability, and the upgraded risk strategy for new customers, resulting in a stable decline in the risk level of new customers in this channel. So compared to Q2, the risk level has decreased by 10%. By the end of Q3, Leading indicator FPD7 for new customers has significantly decreased approximately by 50% compared to the peak level in Q4 last year. At the same time, we are able to uplift to some extent in the approval rate in order to promote the growth of high-quality loans for new customers. So we expect the risk level of new customers acquired through the online advertising channel to catch up with the leading platform in the industry by the end of 2024. Regarding the latter part of your question, for the overall asset quality recovery progress, the day one delinquency rate of the total assets decreased by 9% in Q3 compared to Q2. We estimate this downward trend will continue in Q4 So based on our continued advancement of the overall risk management upgrade efforts, we are confident that with the ongoing optimization of asset structure, namely we will reduce the portion of delinquent asset and promote the generation of high-quality asset. According to our schedule progression with the risk management initiatives, we expect to see a significant increase in our net profit in 2025. Hope that answers your question, Zoe. Okay. Okay.

The next question is about the division. I'll answer it. This business is based on the company's continuous improvement of risk capability. We accurately identified the customers. Based on the division of different customers, we adopted a differentiated business strategy to launch the whole digital distribution platform. This is a business model of a whole new asset. The company does not bear the loss of the entire capital risk, but it can widen the boundaries of the company's entire business. At the same time, it also reduces the entire impact of the risk fluctuation facing the company in the future in the industry cycle. In the ICP model, we can identify customers of different risk levels more clearly, provide a more precise division and pricing, and distribute assets to the entire organization corresponding to the relevant risk bias through traffic distribution. can provide customers with longer life cycle services, thereby creating better and more sustainable revenue for the entire technology service. Q3 has just been launched and the share price is relatively small. We believe that this business is more important for adjusting the entire asset structure and business model. It can bring more stable business power. In the future, we will continue to follow this model to make adjustments to the entire asset. We expect this model to have a lot of room for growth in the future.

Let me translate for Jay's comments. Well, thanks to our continued effort to strengthen the internal capability, especially the risk management capability, we have been able to upgrade the risk identification capability that enabled us to conduct a more precise customer segmentation and launch the new model, ICP, short for Intelligent Credit Platform Model, ICP is a capital-light profit-sharing model where leasing does not bear the risk of principal loss. The new model expands our addressable market while smooth the potential risk fluctuation across credit cycle. Through the ICP model, we can identify customers with different risk levels more precisely, provide more accurate segmentation and differentiated pricing, then distribute these assets to financial institutions with corresponding and complementary risk appetite. This approach allows us to offer customers longer lifecycle service, thereby generating more sustainable revenue from technology service. Well, although the ICP model just got launched in Q3 and only accounts for a very small portion of our total loan volume currently, We believe this business line is crucial to adjusting our overall asset structure and turn our business model into a more sustainable one. We believe ICP model still has significant growth potential. We will continue to make product mix adjustment through expanding this model. Zoe, I hope this address your question.

Thank you very much. The next question comes from the line of Yu Xianchun from Huatai Securities. Please ask your question.

Thank you for giving me the opportunity to ask a question. I am Chen Yuquan from Huatai Securities. I have two questions for you. First, you mentioned that the capital cost of this quarter is at a new low. Can you tell us more about the movement behind it and the outlook on the capital cost of the fourth quarter? The second question is about the cost of goods in this quarter. We see a significant decline. At the same time, I would like to ask the new customers to introduce the main measures they are taking and whether the future purchase cost can maintain such a downward trend. Okay, let me do the translation. Hello, management. I have two questions. The first one is, we noticed management also mentioned that the funding costs hit a new record low this quarter. Could you elaborate on the drain factors behind this and provide an outlook on funding costs for Q4? And the second one is, in Q3, unit customer acquisition costs significantly decreased, and the number of new approved credit line customers increased substantially quarter-on-quarter. Could you introduce any measures taken on whether the customer acquisition costs will continue to drop in the future? Thanks.

Okay, I will take the first question.

funding costs decreased by approximately 100 basis points to 4.28% in comparison with Q2. This really marks the 11th consecutive quarter of reducing funding costs since Q1 of 2022, reaching a new historic low and achieving the largest quarterly reduction. For the fourth quarter, given that we're already at a historic low funding cost, And also considering there is a kind of a seasonality of tightened funding, typically before the end of the year, right, for financial institutions. So we anticipate relatively milder optimizations in funding costs for Q4. Looking ahead to 2025, with the continued implementation of easing money policies supporting the macroeconomic recovery, and more recognition from the funding partners as our asset quality continues to improve. So, we have confidence that we will continue to optimize the funding cost and enhance our overall profitability next year.

Okay. Let me answer the question about the customers. First of all, the cost of our customers has dropped significantly, mainly due to the increase in the customer's ability, especially in the ability of the entire customer's ability. From the ratio of the quarter, our total sales cost has dropped by 24%. The total number of new customers has grown by 22%. The structure in it also has a big improvement. That is, the number of new customers has increased by 34%, and the number of users has increased by 30%, and the cost has dropped by 40%. The risk of new customers, Q3, has further decreased by 10% than Q2. The overall ratio of low-end customers has been further increased, and the return cycle has also been further shortened. The customer end is moving towards a healthier and more positive direction. In the future, we will increase the number of customers and lay the foundation for the growth of next year. Secondly, we have increased the transformation of the total number of customers. In the past 11 years, we have accumulated more than 200 million customers. We will carry out a more detailed operation of these customers. By adjusting their prices and revenues, we will promote the growth of customers. In the third quarter, we achieved a growth of almost twice as much as in the second quarter. The downfall rate increased by 47%, and the cost of internal customers' mining was also lower. The risk level is still 20% lower than that of the remaining new customers. In the fourth quarter, we will continue to increase the overall transformation and mining of the largest number of customers in history, and achieve a growth of lower cost and lower risk. The third point is that in Q3, we have also increased the cooperation with some major KA channels. At present, the overall growth and stability are good. In the future, we will continue to increase the investment in the entire channel.

Hi, Yuxuan. Let me translate for Jay's comments. Regarding your question about customer acquisition, the reduction of this is mainly attributable to several measures. Number one, we have significantly improved our capability and efficiency in customer acquisition through the online advertising channel. On a quarter-over-quarter basis, unit cost of user with approved credit line dropped by 24% Q and Q, and the number of user with approved credit line increased by 22%. As for the portion of good quality and high potential user, total number with approved credit line rose by 34% and the total amount of the credit drawdown increased by 3030%. Meanwhile, we are able to bring down the unique cost acquisition of good quality users by 4040%. As a result, the risk level of new customers dropped by 10% compared to Q2. Moreover, the proportion of good quality users continued to hike and the payback period got shortened. We believe with the strengthened customer acquisition capability, we will probably increase investment in customer acquisition front in the future in order to lay a foundation for the business growth next year. The second measure, we have intensified efforts to activate and convert dormant customers. You know, over the past 11 years, Lexin has accumulated a large user base, roughly more than 200 million users. In the future, we will continue to refine the operation in order to provide more accurate credit line granting and loan pricing for customers to activate dual main customers. In Q3, the total number of reactive paid dual main customers nearly doubled compared to Q2, with the credit line drawdown rate of the approved customer increased by 47 comparatively in the EBITDA. Moreover, the customer acquisition cost for the reactive state customer is low and the risk level is about 20% lower than that of the new customer from online advertising channel. Therefore, in Q4, we will continue to intensify efforts to reactivate and convert existing customers in order to sustain the growth of new customers at low cost and low risk. For the third round, We have further strengthened our cooperation with the leading KA channels in Q3. By far, the volume growth and the profitability looks good. We will continue to increase the investment in this channel in the future. I hope this addresses your question, Yuxuan. Operator, can you check if there are more questions on the line?

There are no more questions on the line. Please continue.

Okay, then thank you everyone again for joining us today. If you have further questions, please contact us via the contact information on our IR website. Thank you all. Have a good day and good night.

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