LexinFintech Holdings Ltd.

Good day and thank you for standing by. Welcome to Le Sing FinTech fourth quarter 2024 earnings conference call. At this time, all participants are in a 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 an 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 host today, Mr. Will Tan. Please go ahead.

Thank you, operator. Hello, everyone. Welcome to our fourth quarter 2024 earnings conference call. Our results were released earlier today and are currently available on our IR website. Today, you will hear from our chairman and CEO, Mr. Jay Wenjie Xiao, who will provide an update on overall performance and strategies. Our CFO, Mr. Alvin Zhang Wenqiao, will then provide more details on our risk management initiatives and updates. Lastly, our CFO, Mr. James Chen, will discuss our financial performance. 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 do not assume any obligations to update any forwarding statement except as required under applicable laws. Last, please note that all figures are presented in RMB terms and all comparisons are made on quarter-over-quarter basis unless otherwise stated. Please kindly note, Jay and Arvin will give their whole remarks in Chinese first. Then, the English version will be delivered by Jay's and Arvin's AI-based voices. With that, I'm now pleased to turn over the call to Mr. Jay Wenjie Xiao, Chairman and CEO of LeXin. Please.

大家好,很高兴和各位分享我们2024年四季度业绩。 四季度,我们秉承着稳健的经营策略, 着力扩大新增优质资产量级, Adjusting asset profitability Under continuous risk data dual drive The company's overall asset risk has been further reduced Profit stability improvement In the fourth quarter, our transaction amount is 519.6 billion yuan Management balance amount 11102.7 billion yuan Revenue 36.6 billion yuan Long gap net profit 309 billion yuan Continuous multi-segment continuous improvement Revenue profit into a fast track of confirmed growth Next, I will introduce to you the two highlights of the four-season business. The first highlight is that the added assets continue to be high-quality documents, and the risk of large-scale assets continues to decline, and profit is growing rapidly. Compared with the last quarter, this quarter, the added asset early risk indicator FPD7 dropped by about 8%, FPD30 dropped by about 9%, and the full asset loss rate dropped by 4%, and the 90 plus bad rate dropped by 3%. First of all, the risk reduction is due to the long-term construction of the company's recognition power, wind control tools, and so on. On the recognition power, the four seasons are introduced through multi-dimensional data, multi-dimensional three-dimensional data, to build a distributed customer-specific data system and recognition model, to strengthen the real-time recognition of user risks, and to assist in correcting the stability of the model through the latest large model technology. System type The risk recognition accuracy rate has increased by 15%. The risk stability has increased by 10%. On the wind control tool, we have built a wind control laboratory for the risk automation test in four seasons. It is a set of small-scale experiment, A-B verification, long-term observation, and dynamic strategic evolution. A new method helps each wind control decision and strategic treatment have data and因果支撑. In the fourth quarter, the company has fully enhanced the digging and operation of high-quality customers. On the one hand, through the establishment of a scenario-specific model, the whole life cycle strategy system to reconstruct the end of the scenario, expand the customer channels and scenarios, and add active users to continue to grow. On the other hand, based on the work model of rapid test verification, fully upgrade and optimize the decision-making system, The price and risk match are more accurate. Based on these effective measures, the price competitiveness and profitability of high-quality customers have significantly improved. High-quality assets have increased significantly. The company's high-quality customers are steadily growing. The stability and sustainability of the business are further strengthened. More specific mistakes about risks will be further explained by the CIO later. The second highlight is . . . . . Thank you very much. The following region's trading volume accounted for more than sixty-five percent of the total business in three consecutive seasons. Overseas business in the cycle of time and risk, middle and back-end rich people, etc. At the same time, the focus is on strengthening local operation management and continuing to explore the new model of customers. The continuation and stability of the business in the cycle of new customers has also been significantly improved. At present, overseas business is still in the stage of exploration and development. The company will continue to promote the stable development of overseas business. In the fourth quarter, the company launched a new asset division model. The digital distribution platform has been further established. The GMV ratio continues to increase. Through this model, the company effectively cooperates with financial institutions to achieve mutual benefits, and continues to increase the company's income and profit. Benefit from the continuous improvement of the company's overall assets, our assets have been welcomed by more financial institutions. Funding sources and structures are more diverse and healthy. Funding costs continue to decrease. In terms of technical investment, the company pays great attention to technical development and applications. The company's development investment of 1.51 billion yuan in the fourth quarter continues to build the leading competitiveness of the industry, especially in the field of AI big models. Through the introduction of deep-seq and other domestic advanced big models, the company has completed the localization deployment. Lexin has a large model base. At present, the base is in the company's telecommunications, revenue, development code support, data analysis, and other daily operations. Deep landing, system execution, and development scenarios. We believe AI will be the core of the company's future There is a huge potential in the transformation of human resources. The company will also increase the strategic investment of AI to maintain industry competitiveness and create greater value. Consumer rights and security is the core competitive advantage and key ability of Lexin. It is to remember that the company has further strengthened the digitalization and systematization of consumer rights and security. Through AI big models and other tools, comprehensively optimize product service focus. In fact, the discovery of service shortcomings continues to complete the consumer communication mechanism, strengthen the consumer communication experience, and win the trust of more consumers. To assist small and medium-sized enterprises in development, the company is actively developing the general financial concept, and continues to improve the feasibility and convenience of financial services through product and service innovation, to assist small and medium-sized enterprises in relieving the problem of long-term debt. The company has issued small and medium-sized loans of more than 300 billion yuan throughout the year. Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan to joining us today.

In the fourth quarter, we maintained a prudent operating strategy, focusing on expanding high-quality assets and optimizing profitability. Driven by enhanced risk management system and advanced data analytics capabilities, we further reduced overall portfolio risk and delivered consistent profit growth. As of quarter end, our outstanding loan balance stood at $110 billion, During the fourth quarter, our GMV was $52 billion, revenue was $3.7 billion, and non-GAAP profit was $390 million. Performance has been improving for multiple consecutive quarters, and both revenue and profit have entered a clear growth trajectory. Now, I'd like to share a few key highlights of our performance. New loans facilitated have consistently maintained high quality, resulting in a continued decline in overall portfolio risk and sequentially improving profitability. Compared to the third quarter, leading risk indicators for new loans, first payment default, FPD, over seven days improved by 8%, and FPD over 30 days decreased by about 9%, on total loan portfolio, day one delinquency ratio decreased by 4%, 90 days delinquency ratio decreased by 3%. The improvement in risk performance is primarily attributed to our long-term and continuous investment in risk identification capabilities and risk management tools. In terms of risk identification capabilities, we introduced multidimensional third-party data, developed tailored data systems and identification models for segmented customer groups, strengthened real-time user risk identification, and leveraged the latest big model technology to improve model stability. As a result, the accuracy of risk identification improved by 15% compared to the previous quarter, while stability improved by 10%. On the risk management tools front, we established a risk control laboratory for intelligent risk testing in the fourth quarter, creating a new paradigm of small-scale experiments. AB testing, long-term observation, and dynamic strategy evolution. This approach ensures that every risk management decision and strategy iteration is grounded in data-driven insights and robust analytical support. In the fourth quarter, we significantly enhanced our efforts in targeting and managing high-quality customer segments. We expanded customer acquisition channels and scenarios by developing CNR-based models and revamping the lifecycle strategy framework, leading to continuous growth and new active users. Meanwhile, we upgraded and optimized the credit line decision-making system based on a rapid testing and validation approach, significantly enhancing the accuracy of risk and credit line matching. Thanks to these initiatives, the competitiveness and profitability of our high-quality customer segments in the fourth quarter. High-quality assets increased substantially, and the steady growth of our prime customer base further strengthened the stability and sustainability of our business. Our CRO, Arvin, will provide further details regarding our risk management initiatives later. The second highlight is the improved efficiency and quality of our refined operations further strengthened our differentiated competitive advantage. During the fourth quarter, business lines in our ecosystem concealed their finance, e-commerce, inclusive finance, and overseas business made notable progress. For online consumer finance business, we deepened our exploration of customer acquisition and operations for segmented customer groups and developed tailored outreach strategies. For e-commerce business, we revamped our risk management system for installment e-commerce platforms, leveraging real-time risk control, order-level risk management, and an upgraded product supply chain to better meet consumers' needs for installment payments and hassle-free shopping. As a result, e-commerce profit entered a fast-growing track in the fourth quarter. For offline inclusive finance business, we refined our sales management system, focusing on serving small businesses owners in lower TA cities by enhancing one-on-one services for core customer groups. Loans originated from fourth and fifth-year cities and below accounted for over 65% of the total GMB. Our inclusive finance business has now been profitable for three consecutive quarters. For overseas business, we strengthened fundamental capabilities in risk management and mid-toe-back office support while pre-monetizing localized operations and exploring new customer acquisition models. This led to a significant drop in new customer acquisition costs and improved operating continuity and stability. While overseas business is still in the early phase, we remain committed to driving its steady growth. During the quarter, our Intelligent Credit Platform gained further traction with its share of GMV continued to rise. This model has enabled effective collaboration with financial partners leveraging complementary strengths to drive sustained growth in both revenue and net profit. Thanks to the consistent improvement in our overall asset quality, our assets have gained greater acceptance among financial institutions. This has diversified and strengthened our funding sources and structure, while growing our overall funding cost. The third highlight is technology. We placed a strong emphasis on research and development and its practical applications. In the fourth quarter, we invested 151 million RMB in research and enhanced our industrializing competitive edge. A key focus has been on AI big models. We have completed our localized deployment of leading large models, such as... and developed our proprietary large model, Singularity. Now, Singularity model is deeply embedded in our daily operations, enhancing efficiency across customer service, telemarketing, collections, coding, and data analysis. In research and development, it's now fully adopted by our development teams. assisting in generating code 860,000 times monthly, and offering 210,000 quality improvement suggestions in 2024, boosting coding efficiency by approximately 35%. Additionally, leveraging DeepSeq has allowed us to deploy private large models for lower occupational costs, opening new avenues for applications in risk management, operating refinement, and workforce efficiency. We believe AI holds immense potential to transform our core capabilities, and we will continue to invest in AI to maintain our competitive edge and drive greater value. In addition to the above-mentioned highlights, consumer rights protection is always a core competitive advantage and key strength. In the fourth quarter, we further enhanced digital and systematic development of consumer protection, leveraging tools like AI large models. We optimized product service touchpoints, identified service gaps in real time, and refined communication mechanisms to improve the overall consumer experience, earning greater trust from our customers. In supporting small and micro businesses, we actively uphold the principles of inclusive finance. Through continuous innovation in products and services, we have improved the accessibility and convenience of our financial services, helping small businesses address challenges in financing. Throughout the year, we facilitated over 30 billion RMB loans for small and micro business. Looking ahead to 2025, amid the current macro and industry environment, we will continue to adhere to prudent operating strategy, prioritizing risk management and driving further de-risking and asset structure optimization. We are confident in achieving significant profit growth this year. It will strengthen our differentiated offerings in credit lines and pricings and refine our operating systems to meet the diverse financial needs of our customers at all levels, delivering high-quality services throughout their life cycle. Additionally, we will proactively broaden our business boundaries to foster consistent growth of our business performance. Starting this year, we will increase our dividend payout ratio to 25% of net profit. As profit continues to grow, we plan to further enhance dividends, consistently boosting shareholder returns. Now, I'll turn the call over to our CRO, Arvind. Thanks. Thanks for joining us.

Thank you. Next, I will report on the work and progress of the risk management in the fourth quarter. In the fourth quarter, we continued to stick to the risk control, steady scale, and profit strategy, and achieved good results. In the fourth quarter, the risk of new assets and full assets continued to fall. Compared to the three-year full-time risk indicator, the new asset FPD7 fell by about 180, the full asset inflow rate fell by about 140, The full amount of assets, 90 plus bad rates, fell by about 130. We mainly use the following aspects to drive the continuous decline in risk. On the one hand, in terms of risk recognition, accuracy and stability, we continue to immerse new high-quality data sources into deeper and original core high-quality data sources to explore data characteristics and joint modeling to improve model performance. At the same time, we increase the exclusive credit rating model construction of business, products, and people. Compared to the general model, the exclusive model modeling sample is more targeted and can improve the accuracy of model prediction very well. In terms of the stability of the model, the model prediction of data loss, data noise, and so on is not certain. We improve the specific uncertainty of the model by algorithmization. The stability predicted by the model These optimized measures have increased the accuracy of risk identification by about 15% and the stability by about 110% On the other hand, we have upgraded our revenue management capabilities and adopted TEST and LEARN methodologies Using the strategy lab to put in revenue experiments for different groups of customers to find the risk to be trusted by different groups of customers and convert them Improve the profitability of different customers, improve the compatibility of customers, balance the scale of growth and risk control, improve the competitiveness of high-quality customers, promote scale growth, and reduce the risk reduction of high-risk customers. Thirdly, we optimized the recognition ability and decision-making system for the API scene. For each core API scene, we established a dedicated risk recognition model, and improved the pre-sale capability at the scene end through joint modeling with the API scene. At the same time, based on the customer attributes and image characteristics of different channels, we established a system that includes while satisfying the needs of customers in different traffic channels, effectively controlling the risk within the range of the number, which benefits from the upgrade of the number. The GMV of the four-level API channel increased by about 23%, while the risk of new increases decreased by about 110%. Fourth, for different entry rates, At the same time, we have launched a special drop-in plan for the people who repeatedly enter, to optimize the return date of customers, to improve the binding ratio of bank cards, and to improve the contract ratio of customers. Combined with the new release of high-quality assets, the ratio of assets in the full amount continues to increase, and the entry rate of the full amount of assets has been continuously improved. In terms of wind control tool construction, we completed the wind control laboratory construction and carried out comprehensive applications in the business to promote our risk management model to upgrade in the direction of risk prediction plus risk experiment. The new wind control laboratory has achieved the complete closure of wind control experiment design, projection, dynamic adjustment, experiment recovery, and experiment modeling. In the wind control laboratory, various experimental variables can be assigned directly, including the entry rules, the degree, the degree, the price model, and so on. The experimental strategy combination that can be created with one button greatly compresses the time of experiment deployment. The wind control laboratory can also carry out intelligent flow separation and dynamic sample isolation, and promote good-second real-time flow distribution, and support user-level, equipment-level, Demand for multi-layer experimental isolation at the same time according to the user image and the dynamic group calculation of the risk division can be very good to ensure the sample independence of the experimental group and the sample group Avoid data pollution in the new year we will continue to upgrade Thanks, Jay.

Next, I will provide a review of our key initiatives and achievements in risk management for the fourth quarter. In the fourth quarter, we remained committed to our strategy of prioritizing asset quality, focusing on scale stability and profitability enhancement through three key initiatives and have achieved solid results. Compared to the third quarter, leading risk indicators for new loans, first payment default, FPD, over seven days declined by about 8% in the fourth quarter. On total loan portfolio, day one delinquency ratio decreased by 4% and 90 days delinquency ratio decreased by 3% quarter over quarter. The continued declining risks was achieved by the following key initiatives we've taken. First, to enhance the accuracy and stability of risk identification we have introduced new high-quality data sources while conducting deeper data mining and joint modeling with our existing core data sources to improve model performance. At the same time, we have ramped up the development of dedicated scoring models for different business lines, products, and customer segments. Compared to general models, dedicated models use more targeted modeling samples, which significantly improve prediction accuracy In terms of model stability, we have addressed uncertainties in model predictions caused by factors such as missing data and noise by employing algorithms to quantify the specific uncertainties, thereby enhancing prediction stability. These optimization measures have led to about a 15% improvement in risk identification accuracy and a 10% increase in model stability. Second, we have upgraded our credit line management capabilities by adopting the test and learn approach, leveraging our strategy laboratory. We conducted credit line experiments across different customer segments to identify the optimal fit among credit line, borrower risk, and user conversion. This approach has enabled us to optimize credit lines for various user groups. improve the accuracy of credit allocation, and balance business growth and risk control, which has ultimately helped drive scale growth driven by a more competitive credit line for high-quality customers and mitigate risks from reducing credit line for high-risk customers. Third, we have optimized and restructured our risk identification and decision-making system for API scenarios. We developed dedicated risk identification models for each core API scenario and enhanced risk screening upfront through joint modeling with API scenarios. Furthermore, based on the customer characteristics and profiles of different channels, we have implemented a differentiated full suite of strategies covering admission, transactions, credit amount, and pricing. This enables us to meet the credit needs of customers from various traffic platforms while effectively keeping risk within our preferred range. Thanks to these upgrades, GMB of our API channels increased by about 23% quarter over quarter, while risk of new assets declined by 10% compared to the prior quarter. Fourth, we implemented differentiated Purdue Day reminder strategies tailored to groups with different probabilities of default. Meanwhile, for customers with repeated delinquencies, we launched a dedicated project focusing on optimizing repayment date settings, increasing the binding rate of frequently used bank cards, and improving the rate of auto bid agreements. As the share of new assets from PrimePlus customers continued to grow, day one delinquency ratio of the total portfolio has continued to decline consistently. Last but not least, in terms of risk control tool development, we have completed the construction of a risk control laboratory and fully applied it into our operations, advancing our risk management approach towards a combination of risk prediction and risk experimentation. The new risk control laboratory has established an end-to-end process, covering experiment design, credit allocation, dynamic adjustments, result evaluation. With the laboratory, we can not only directly set experimental variables, such as admission rules, tiering of credit line, and pricing models, but can also generate different strategies with one click, which significantly reduces deployment time. Also, the risk control laboratory supports intelligent traffic segmentation and dynamic sample isolation, enabling real-time millisecond traffic distribution, as well as multilayered experiment isolation at the user device and request levels. Furthermore, through dynamic bucketing algorithm based on user profiles and risk stratification, the laboratory ensures the independence of samples between experimental and control groups, effectively avoiding data contamination. In 2025, we'll continue to improve our risk management capabilities comprehensively, covering risk identification, risk decision making, and risk tool development. This will drive continued decline in risk, improvement in profit, and stable growth in scale. Next, I will hand over to our CFO, James, to provide a review of the company's financial performance for the fourth quarter.

Thanks, Arvind. I will now provide a detailed overview of our fourth quarter financial results. Please note that all comparisons are made on a quarter-over-quarter basis unless otherwise stated. In the fourth quarter, we advanced our business transformation efforts, maintaining a prudent operating strategy while strengthening our risk management framework and driving business optimization. We are pleased to report the key performance metrics continued their upward trend from the third quarter, aligning with our expectations and delivering steady growth. These results underscore the effectiveness of our strategic direction and highlight the progress we've made in executing our initiatives. During the quarter, driven by a decline in credit costs, including the provisions and the fair value changes of financial guarantee derivatives, our net income increased by 17 percent to $363 million, even though the total GNV remained relatively stable. Net income increased by 54 percent compared to net income adjusted for the investment losses in the same period of last year. The net income take-away, calculated as the net income divided by the average loan balance, increased from 1.09 percent in the third quarter to 1.31 percent in the fourth quarter, advancing by 22 basis points. We are on track of our profit margin expansion roadmap. Before delving into the financial items, I would like to share some highlights that contributed to this sustainable and in-line growth result. First, increased overall take rate due to continued asset quality improvement. In the fourth quarter, we achieved revenue take rate of 6.22%, a 36 basis improvement from 5.86% in third quarter. Even though the overall APR charge to users actually decreased by more than 100 basis point, as we focused more on high quality customers. The weighted average APR for loans now stands at 23.88%. This take rate was calculated as the sum of revenue from credit facilitation and take empowerment services, net of funding and credit cost divided by the average loan balance. The primary driver of this increase in take rate was continued improvement in asset quality. Our credit costs, which include all provisions and changes in fair value of financial guarantee derivatives and loans at a fair value, decreased by 5%, or $73 million to $1.5 billion in the fourth quarter, reflecting enhanced risk performance. This improvement stems from our risk management initiatives previously highlighted by Jay and Arvind. All our key risk indicators showed continued improvement in the fourth quarter. Specifically, on the loan balance side, day one delinquency rate declined by 4%, and the 90-day delinquency ratio declined by 3%. The risk performance of new loans aligned with our expectations, with the first payment default rate over seven days decreasing by about 8%, and FPD over 30 days decreasing by almost 9%. Additionally, we shortened the loan duration from 13.24 months to 13.13 months. Second, further decrease in funding costs. As another driver of our take-away improvement, our funding costs for new loans facilitated decreased by 26 basis points, encouraged by our improved risk performance our funding partners have been highly supportive, offering favorable terms in both funding costs and supply. We also expanded and diversified our funding sources, with the number of financial partners growing to 63 in the fourth quarter. Looking ahead, we expect that the continued improvements in asset quality, deeper collaborations of our funding partners, and more diversified funding mix will lead to further optimization in funding costs although may not be as significant as before. Third, more balanced and healthy revenue mix. Our revenue structure was optimized through several initiatives, including lower APR, increased capital light loan volume, and diversification of business lines. In the fourth quarter, as we continue to execute our strategy to optimize risk exposure, We focused on acquiring high-quality customers, which led to decrease in APR for the newly originated loans and a corresponding decline in the credit facilitation service income. However, this decline was offset by a 57% increase in tech empowerment service income, which represents income from our capital light model and other services. Empowerment income accounted for 16% of our total income, up from 11% in the previous quarter. The growth in tech empowerment income was primarily driven by increased volume from our intelligent credit platform, ICP platform. As an important component of our capitalized model, ICP was designed to match borrowers with a risk rating beyond our preferred range with financial institutions and other platforms through a traffic redistribution platform. In the fourth quarter, the loan originations under the ICP model increased to 14% of total new loan volume. Furthermore, to enhance customer experience and provide more comprehensive services, we facilitated insurance products as well as certain royalty programs as a retention effort. Revenue from these initiatives also contributed to the growth in the tech empowerment service income. Last but not least, our installment e-commerce platform income, a complementary component of our core credit facilitation service, grew by 12% quarter over quarter and accounted for 9% of total income. Fourth, improvement in customer acquisition efficiency. In addition to aforementioned ticket increase, funding cost decrease, and revenue mix enhancement, we are committed to optimizing our sales marketing expenses by improving customer acquisition efficiency. By leveraging advanced risk identification and management systems, combined with our deep expertise in traffic distribution, We have strengthened our ability to target users more actively, identify potential customers, and deliver better user acquisitions with higher approval rates. As a result, new active users, excluding the ICP business, grew by 23 percent quarter-over-quarter, while the cost per active user decreased by 21 percent. We will continue to invest capital to acquire more users for the long-term sustainable growth. Now I will go through our key financial line items. On the revenue side, credit facilitation service income decreased by 9% quarter over quarter, mainly driven by the decrease in the new loan pricing. The APRs for the new loans originally in Q4 decreased by more than 100 basis points. The tech empowerment service income increased by 57%, driven by increased volume from our capital like ICP and income generated from value added services like insurance products and user loyalty programs. E-commerce business revenue increased by 12% due to the increase in the GMB momentum. On the cost and expenses side, credit costs including the provisions and fair value changes of financial guaranteed derivatives and loans at fair value decreased by 5% quarter-over-quarter due to consistent improvement in our asset quality. Total operating expenses, which include processing and servicing costs, sales and marketing, R&D, and G&A expenses, remained relatively stable at $1.3 billion. Driven by the aforementioned factors, our net profit in the fourth quarter increased by 17% to $363 million, our net profit margin as a percentage of total revenue increased from 8.5% to 9.9%. For balance sheet items, as of the end of 2024, our cash position, which includes cash, cash equivalents, and the restricted cash, was approximately $4.1 billion. Shareholder's equity remained solid at about $10.7 billion. Our provision coverage ratio remains sufficient at approximately 255% at the end of fourth quarter. As Jay mentioned, we are committed to providing sustainable values to our shareholders. We are pleased to announce the Board of Directors has approved a cash dividend of US dollars 0.11 per ADS for the second half of 2024. equivalent to approximately 20% of total net profit for the second half of 2024. As a reminder, as we announced the last quarter, effective from January 1st this year, our cash dividend payout will be raised to 25% of net income. The payout will be announced in August when we announce Q2 result. In the future, we are open to increase the cash payout ratio as appropriate to align with the growth of profitability. Looking ahead, while our performance continues to show positive momentum, we remain prudent in light of ongoing macroeconomic uncertainties. Therefore, we expect Q1 GMV to be flat with Q4, also due to the Chinese New Year seasonality. For 2025 all year, we expect flat to single-digit year-on-year GMV growth, depending on the macro, alongside a significant rise in net profit driven by profit margin expansion underpinned primarily by continuous asset quality improvement and our overall business transformation. This concludes our prepared remarks for today. Operator, we are now open to take questions.

Thank you. As a reminder, to ask a question, you need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Zihan Wang from Goldman Sachs. Please go ahead.

Hello, thank you for giving me the opportunity to ask this question. Congratulations to the company for achieving a strong performance. I am Zihan Wang, a senior analyst at Kaohsiung. I have two questions to ask. First, I would like to ask about the company's performance plan for 2025. Second, I would like to know about the current AI layout of our company. I will transfer it to my question. The first question is, what's our business plan for 2025? And the second is, what is our AI-related business layout and the specific applications of AI technologies such as DeepSeq? And what are our future plans about AI?

Thank you. . . . . . . . Our 23 years and the previous part of this part of a whole stock of assets We have already seen the entire asset that we have newly issued It's all about its risk. It's all about our risk bias and so on. The profit is also up to our entire expectation We expect that in 25 years our asset quality will improve significantly So what about the improvement of our entire asset quality What about the improvement of our entire asset quality The whole good expectation In addition, our capital costs will continue to rise. We will also promote the company to improve the overall operating efficiency. We will also further enhance the overall operating efficiency of the company in the field of detailed operation. We expect that we will still be full of confidence in the overall profit growth of 25 years this year. Then in terms of scale, our goal is still to maintain the overall stable growth in scale. We will do a few things this year. The first one is that we will optimize our entire customer base to further improve our customer efficiency. The second one is that we will increase the cooperation with various traffic and large platforms to increase the volume of our entire customer base. The third one is that we will also add some investment to our entire customer base and actively promote the growth of the company's entire business scale. So let me translate for Jake.

Thank you, Zuhan. In 2025, our strategy remains prioritizing asset quality, focusing on profitability enhancement. With a priority on asset quality, we aim to profitability enhancement and the scale stability. In terms of risk, we will continue to upgrade our risk management system. The deal notes we facilitated this quarter credit performance is in line with our expectation. And we will drive the continuous decline of key risk indicators in the future. In terms of profitability, we are committed to driving significant growth in net income by leveraging continuous enhancement in risk performance, optimize the funding structures and cost and improved operational efficiency. In terms of scale, our goal is to achieve stable growth by improved efficiency of customer acquisition through our high quality client engagement and enhance synergies with our partners and platforms, offline inclusive finance and e-commerce business. We also will increase our investment in customer acquisition this year to further enhance the improvement efficiency of customer acquisition. Despite the overall positive momentum, our performance may experience volatility due to macroeconomic headwinds and seasonality fluctuations. We will adjust our growth strategies in real time based on the evolving environment.

In terms of AI, as mentioned earlier, we are the first industry to use DeepSeq. In 2015, In May of 2023, we have introduced the entire VR version of DeepSeq. In recent years, we have also upgraded the R1 version of DeepSeq. Combined with the data accumulated over the past 10 years, we have completed the entire deployment of some pre-training and gold bars in the financial field for DeepSeq. Currently, we have also built a large model base that is used internally in DeepSeq. It has become a whole financial platform for the application of this technology in China. We have started to use this technology in many business scenarios to assist companies in improving the efficiency. For example, in the innovation of tools, in the performance of business, the company's large model has been used in the main business processes such as e-commerce, customer service, and acquisition. We are also continuing to follow up on our dialogue processes to improve the entire conversion effect. In particular, in recent years, we have been using some applications in terms of代扣策略. So we use the big model to deal with some of our potential customers to carry out a full-fledged代扣. So we see that in terms of the experiment of the entire comparison group, it has achieved a very good effect. In addition, in fact, we will continue to increase some of our investment in AI in the future, and will begin to explore how to apply more AI technology in various areas of risk to help companies to improve Let me translate.

As reported, Luoxin is one of the first financial platforms in China to implement a DeepSeq model. Following the deployment of DeepSeq V2 in May 2023, Luoxin has recently upgraded to DeepSeq R1. By leveraging over a decade of industry expertise and data accumulation, We have conducted pre-training and localized deployment on DeepSeq and developed Singularity AI, our own financial large model. We have deeply applied AI technology to improve research and development efficiency, boost tour innovation, and business enablement. Our large model has been fully deployed in core operation workflows, including telemarketing, customer service, and collections. Through continuous optimization of dialog flow trace and the user conversion. We have demonstrated substantial improvement in both operation efficiency and customer experience. Also, we applied this advanced technology into our collection process. As Alvin just mentioned, we used this to improve the collection efficiency for delinquency customers. In the future, we will strategically intensify technology investment with a primary focus on advancing deployment of DeepSeq R1. We will implement comprehensive process optimization across all business segments, explore its application in key areas of risk management, and leverage technology to further enhance our risk management capabilities.

Thanks, Zuhan. Operator. Thank you for the questions. One moment for the next question. Our next question comes from Alex Yeh from UPS. Please go ahead.

Thank you, Dr. Guan, for giving me this opportunity. I have two questions about risk. The first one is, of course, we are very excited to see some improvements in risk indicators. These may be the premise of the company's continued construction of wind control capabilities. Can you give us more details about the latest progress in this area, especially compared to the copper industry, what kind of position we are in? The second question is, if we continue to look at it this year, we may focus on wind control. and some of the main targets, especially since we have released a lot of different indicators. Which ones are more worth paying attention to? I'll translate for my question. So first question is about the company's ongoing investment in your risk management capabilities. Can you share with us some more current in terms of the latest progress on the achievement you have made and especially what's the current gap or differences versus your peers? Second question, it's about the outlook for your risk management metrics. So what are the main targets that you aim to achieve in this year and which are some of the most important indicators that you would suggest investors to check.

Next, I will answer these two questions about risk management. Regarding the first question, in the past year, we have made significant progress in terms of wind control capability and wind control system development. Currently, we have reached a level of the same industry in terms of wind control system. And in some specific parts, such as smart wind control tools, construction and applications, we feel that we can still lead the entire industry in some areas and aspects. At the same time, in the wind control system construction, we have fully upgraded the risk identification, risk decision-making, and the risk assessment and behind-the-scenes management of risk management capabilities in various key areas, This has greatly improved our accuracy and stability in risk recognition and our ability to target risk decisions. In addition, at the risk management methodology level, we have also introduced Law and Growth in terms of entry and entry, Test and Learn in terms of revenue decisions, Risk and Respond in terms of air-to-air pricing, and so on. The decision-making system can help us to upgrade and improve the scientific and targetedness of our entire risk management decision. At the same time, at the risk management tool level, we have also developed and established a batch of risk management tools in the past year to help us to carry out risk management work more efficiently and accurately. The main ones include the automatic inspection tools of risk, and the wind and air laboratory, and the risk decision-making robot. The construction of these tools can better support the improvement of our entire risk management decision-making. In terms of the results, our key wind and air risk indicators are gradually improving and improving. whether it is the 90-day expiration date of our stock assets, or the expiration date of our stock assets, as well as the FPD7 and FPD30 of our new assets, have continued to improve and improve over the past year. This means that our upgrades in risk management capabilities and systems have gradually begun to reflect and bring corresponding results and value. Although due to the impact of the stock loan, we have a little distance from the same industry in terms of the risk indicators of full assets, but with the increase in the proportion of new high-quality asset loans in full assets, and the gradual rise in the stock of high-risk assets, Let me translate.

Overall, we achieved significant improvement of risk management capability for this quarter. Overall, our risk management capability has reached industry level, and in specific technical aspects, we are already at the industry leading position. we have comprehensively restructured and upgraded key risk management process, including risk identification, decision making, risk pricing, and post loan management. These enhancements have significantly improved the accuracy and the stability of our risk management system. Meanwhile, we have upgraded our decision making methodologies, such as test and learn, and flow and grow frameworks for credit line and pricing decisions. And we also improved our risk tools such as dedicated risk control laboratories and risk robot to validate and support our key risk decisions. As a result, our key risk indicators including 90 days delinquency ratio and FPD 30 days ratio have improved for two consecutive quarters. which underscore the tangible benefits yielded by our risk management transformation efforts. Despite these achievements, our overall performance still has some gaps compared to our peers, mainly dragged by legacy loans. However, as the proportion of high-quality new loans increases and the decrease of legacy loans, we expect the overall portfolio quality to further improve.

Okay. Regarding the key work in terms of risk management this year, we will continue to work around reducing risk, increasing scale, and then increasing profits. These three aspects are key to promoting our work in terms of risk management and control. Among them, in terms of reducing risk, we will further increase and strengthen our accuracy and stability in terms of risk identification. And then to enhance the efficiency of our retreat and decrease the amount of time to reduce and control the production of bad molecules At the same time, we will also further enlarge and enhance the competitiveness of our offer for high-quality customers, which will drive and promote a steady growth in the size of high-quality customers, which will optimize our entire asset structure and promote our The overall structure of the asset continues to improve and improve In order to drive the risk of our new assets and storage assets to continue to decline On the other hand, in terms of size, we will fully upgrade and upgrade We are in the whole channel The competitiveness of the customer and the offer increases the acquisition of a new customer and at the same time reduce the current loss of our customers and for the past loss of customers through this kind of offer optimization and promotion to promote the return and activation of these lost customers On the other hand, we will use our e-commerce ecosystem to promote an increase in our entry-level pass rate and then Strengthen the ecosystem of our e-commerce and sales And then promote and introduce more customer growth And then help us in it Increase our entire company, whether it's in the number of customers Or on a scale of a sustainable growth At the same time through risk management and then increase profits On the one hand, we will continue Through various risk tools and capabilities Promote a risk reduction of our new assets and full assets So as to drive and reduce our entire risk cost Promote a growth in profits At the same time, we will continue to optimize and improve our use efficiency in the three-way data So as to improve this ROA In addition, in terms of revenue costs, we use this the differentiation of consumption strategies and introduce this kind of intelligent consumption tools to improve and improve our consumption return rate and reduce the cost of consumption, so as to help and improve our ability in terms of profit. In addition, we will also further study and explore this kind of large model in the entire risk management field, The use and application of this depth promotes our ability to manage risks. At the model level, it is mainly aimed at different customer groups and scenarios. Through this big model, there is also an introduction of the preliminary algorithm to improve the core recognition ability. For example, in terms of loss, we can further enhance and optimize the predictability of our loss model, and then optimize an offer for these potential loss customers, and then maintain their use and stability. Another piece is for the competitive furniture in the modern field of the entire industry. We will also strengthen the recognition of this competitive model, and enhance the competitiveness of our offer, in order to promote high-quality and potential customers. In addition, in terms of AI smart tool construction, we will continue to enhance and optimize our wind control laboratory and wind control strategy robot to greatly enhance and improve our efficiency and accuracy in terms of risk decision-making. In terms of risk management indicator tracking, You can pay attention to our full-fledged assets, and then the core and key indicators such as the 90-day expected rate. In terms of new assets, and in terms of the risk of full-fledged risk indicators, you can pay attention to the FPD7, FPD30, and other new asset full-fledged indicators released in each quarter at the press conference. Let me translate.

Our goal is still to prioritize asset quality, focusing on scale stability and profit enhancement. Building upon the established risk framework, we will further optimize as follows. In terms of risk detection, we will optimize asset structure by increasing the inflow of high-quality customers. Also, we will refine our collection strategy through differentiation and intelligent collection tools, ensuring our continuous decline in risks for both new loan and loan balance. In terms of scale, by enhancing specialized customer acquisition capabilities, across all channels and improving offer competitiveness. We will drive the inflow of high-quality new customers, activate potential customers, and expand credit admission through our e-commerce platform, thereby promoting high-quality asset growth and strengthening the company's ability to navigate credit cycle. In terms of profitability enhancement, we will upgrade the pricing strategies for customer segments with different risks and we will further improve third party data to further enhance our accuracy. We will improve the ROI of data costs and by utilize collection tools such as intelligent case allocation and collection assistant to improve our collection costs. Meanwhile, we will leverage AI and large models to further enhance our efficiency and accuracy. On AI model level, we will strengthen our risk identification capabilities for different customer segments and scenarios. For example, by using customer retention model to predict customer less, we can implement targeted retention strategies. By using competitiveness model to identify users' key demand, we can improve offer competitiveness and effectively enhance high-quality customer acquisition and potential customer activation. At the AI tool level, we will continue to develop our intelligent risk management capabilities. For example, we will continue to leverage tools such as strategic robots and decision-making laboratory to enhance the accuracy and efficiency of strategic decision-making. Regarding performance tracking, in addition to 90 days delinquency ratio and FPD over 30 days ratio, which we regularly disclose, We will also communicate the quarterly trend of FPD 7 days of new assets and the day one delinquency ratio of total portfolio, which could facilitate a more comprehensive understanding of our asset quality. Thank you. Operator, we are ready for next question.

Thank you for the questions. The final question comes from the line of Yadan Li from CICC. Please go ahead.

Hello, Mr. Guan. First of all, congratulations to the company for receiving a very bright 1st place, and thank you for giving me this opportunity to ask a question. Today, there are three questions that I would like to ask Mr. Guan in advance. The first one is about the positive aspects of the company in 2025 and the main driving factors. The second question is to ask about some of the prospects for the company's operating expenses in 2025, especially in terms of marketing expenses, whether there will be some more powerful investments compared to last year. The last question is also to ask whether there are any other plans for the return of investors. Thank you very much, Mr. Guan. Then I'll do the translation. Okay. Go ahead. Yeah, go ahead. Okay, okay. Then I'll do the translation. So first of all, could you elaborate more about the trend of unit economics and the main drivers? Second, I was wondering how to view the OPEX in 2025, especially in sales and marketing expenses. Will the company become more active in customer acquisition in the following quarters? And the last, do you expect to deliver more value to the shareholders and any further plans? That's all, thank you.

Okay, I will take the first two questions and then ask Jay to answer the third question. First, in terms of the unit economics, as we have been communicating with the market, if you look at the net profit margin of the company, it is calculated as the net income divided by the average loan balance. It will increase significantly to reach the industry average level in the next two years. Obviously, the primary driver for the asset is the asset quality improvement, particularly for the new loans issued since the second half of last year. As an example, in Q4, if you look at the provisions, it was reduced about by 5% compared to the previous quarter. So as you know, the total loan portfolio is a mix of the old legacy loans and the better quality new loans. As we have more better quality new loans and the old loans will mature and lapse, therefore the overall asset quality will continue to improve, which will lead to sustained probability improvement or net profit margin expansion. Another factor obviously contributing to the improvement of probability is the reduction in the funding costs. As our asset quality continues to improve, our assets received more acceptance from the financial institution partners, and the funding costs were declined accordingly. So, as a demonstration of our profitability improvement, we can take a look in the net profit margin in the last four quarters in 2024. It started from 0.66 percent in Q1, 0.77 percent in Q2, 1.09 percent in Q3, and 1.31 percent in Q4. So, we expect the net profit margin to continue to sequentially improve in the next two years to eventually reach the industry average level. One reminder, of course, is that we may experience certain fluctuations in the degree of the profit margin improvement from quarter to quarter due to the impacts of seasonality, accounting rules, or any other timing factors. but we are very confident the overall net margin expansion trajectory will not change. As for the second part of the question, the OPEX, basically to continue to support the user acquisition and the business growth, i.e., expanding new marketing channels, upgrading risk control systems, hiring top talents, and increasing AI technology investment, we do expect the absolute amount of the companies operating expenses to increase in 2025. although it will be at a slower pace than the overall company profitability improvement. The operational efficiency improvement is another factor that contributes to the margin expansion. So we will continue to work hard to balance the need of investing for the future, and also the need to sustain the sequential profitability improvement. So that's the answers, if you will, for the first two questions, and the last one is for Jay. Okay.

We actually announced last quarter that we have increased the share price of the company to 25 percent by the beginning of this year. We expect that in August of 2025, after the second quarter, we will distribute the entire share price of the first half of this year to all shareholders. So the company has always paid great attention to the entire return of shareholders. This year is the year of the company's return on profits. We expect that this year's profits will grow significantly. We will also maintain Let me translate.

As we announced previously, our cash dividend payout will be raised to 25% of net income, effective from January 1st this year. The dividend will be announced in August when we disclose our second quarter results. We are committed to returning values to our shareholders. This year is our business and financial result turnover year. We expect our net income will increase significantly in 2025, and we are open to increase the cash dividend payout ratio as appropriate to align with shareholders' expectations. Thanks. Operator.

Thank you for the questions. We have no more questions from the line. I would like to hand the call back to management for closing.

Thank you. This conference is now concluded. Thank you for joining today's call. If you have any more questions, please do not hesitate to contact us. Thanks again.

That does conclude today's conference call. You may now disconnect.