Qifu Technology, Inc

Thank you for standing by, and welcome to the 360 Digitech Second Quarter 2021 Earnings Conference Call. Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Mandy Dong, IR Director. Please go ahead, Mandy.

Thank you. Hello, everyone, and welcome to our Second Quarter 2021 Earnings Conference Call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wu Haisheng, our CEO and Director, Mr. Alex Xu, our CFO and Director, and Mr. Zheng Yan, our CIO. Before we begin to prepare the remarks, I'd like to remind you of our safe harbor statement in our earnest press release, which also applies to this call. We may refer to forward-looking statements based on our current plans, estimates, and projections. Also, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for our conciliation between non-GAAP and GAAP-1s. Last, unless otherwise stated, all figures mentioned are in RMB. I will now turn the call over to our CEO, Mr. Wu Haisheng.

Hello, everyone. I am very happy to share with you another quarter of our record-breaking record. Through our platform, we have raised 8.85 billion yuan per quarter. This is a new record for us. We have increased by 50% and increased by 19%. We have increased by 1176 billion yuan per quarter. We have increased by 50% and increased by 15%. Hello, everyone. I'm very happy to report another quarter of record-breaking operational and financial results. During the quarter, financial institutions originated RMB

88.5 billion loans through our platform, marking another record high, up 50% YOY and 19% Q&Q. After reaching RMB 100 billion milestone in Q1, outstanding loan balance continued to grow to RMB 111.6 billion in Q2, up 50% YOY and 15% Q&Q. Total revenue was RMB 4 billion in Q2, up 20%, 20% YOY, and 11% QOQ. Non-GAAP net income was RMB 1.62 billion, up 71% YOY, and 15% QOQ. Despite the constant changes in the red-light and monitoring environment, we have broken historical records in five consecutive seasons. This shows that

After many years of storage, our overall system has been very resilient. Multi-sphere, multi-sphere customer channels can effectively avoid the fluctuation of single channels. The large number of multi-sphere financial institutions and partners provide sufficient resilience in terms of capital costs, land and pricing. The risk management capabilities of the entire customer group can be used in the user group and pricing.

Despite a continuously changing macro and the regulatory environment, we have delivered five consecutive quarters of record-breaking results. Over the past few years, we have built a comprehensive operational system that demonstrates remarkable resilience throughout the cycles. To be more specific, Our diversified user acquisition channels and scenarios allow us to effectively hedge against any volatility from a particular channel. Our extensive network of diverse financial institution partners gives us sufficient flexibility in terms of funding costs, geography coverage, and pricing. Our full spectrum risk management capabilities allow us to target different user segments with effective pricing based on different market dynamics. Our access to some key financial licenses also gives us ecosystem-grade flexibility to comply with the ever-changing regulatory environment.

Over the past month or so, China's capital markets, including QFIN, have undergone a huge shift in the capital market. Although there are many risks, When we think that the current market response is overly concerned about the negative factors, we ignore the firm foundation and the advantageous growth of the company itself. Therefore, after careful consideration and decision making by the management, and approval from the board, we will launch a stock repurchase plan. In the next year, the company will repurchase the company's ADS of up to $200 million through the public market. 我们认为在当前市场环境下,回购是最有效,利用现金产生良好收益,回馈给我们的投资者的最好方式。 Over the last six weeks or so, Q-Think along with other Chinese ADRs has experienced extreme volatility in the markets.

While there are multiple risk factors triggered, such as share price movement, we believe the market is overreacting to the negative elements and ignoring the solid fundamental and strong growth prospects of QFIN. As such, after a careful evaluation with the approval of our board, management decided to launch a share buyback program. the company intends to repurchase up to US dollar 200 million of its ADS through open market or other form of transaction over the course of next 12 months. We believe at current market condition, share repurchase offers extremely attractive opportunity to exploit our cash and to generate great returns to our shareholders.

We have mentioned many strategies We continue. . We continue to make progress in multiple strategy initiatives and gradually unlock tremendous growth opportunities.

We made significant progress on diversified user acquisition strategy. Customer base continued to grow and the customer's quality improved steadily. Our embedded finance model grew significantly. The number of new borrowers in Q2 hit the highest level in the past six quarters, up by more than 10% sequentially. The number of SME borrowers acquired offline also increased significantly. Our embedded finance model contributes close to 40% of our new customers with approved credit lines in Q2. So far, we have established cooperation with 22 leading traffic platforms with another 8 in the pipeline.

Our small and medium-sized businesses have achieved breakthrough results in Q2. By strengthening the cooperation with our leading partners, continuing to optimize audit policy and revenue strategy, Q2 small and medium-sized business loans increased the net profit by 71.2 billion yuan, which increased by 22% in total, and increased by 45% in total, with an average net profit of 250,000 yuan. At the same time, we launched customized products in line with the characteristics of different industries. In July, we successfully launched the tobacco business band, which has accumulated more than 700 services for offline tobacco shops. In the second half of the year, we will further expand our business in cross-border e-commerce, supply chain finance,

Our SME finance business also achieved a breakthrough performance in Q2. By strengthening our ties with the leading industry partners and the optimizing credit approval process and the policies, total amount of new approved coin line increased 22% Q1Q to RMB 7.1 billion and outstanding loan balance increased 45% sequentially, with every ticket size exceeding RMB 250,000. Meanwhile, we are rolling out customers' loan products catering to the specific funding needs of different industries. In July, we launched Tobacco Business Loan and have served more than 700 offline tobacco business owners. In the second half of this year, we plan to launch other industry-specific loan products targeting cross-border e-commerce, supply chain finance, as well as agriculture and forestry sectors.

Our technology strategy has been upgraded and is rapidly advancing in Q2. Q2's new asset model is up to 56% in terms of issuance. In July, it was even close to 60%. It is very close to our goal for the whole year. Smart marketing products, intelligent engines, Long facilitation under the Capital Light model accounted for roughly 56% of total volume in Q2.

And for the month of July, Capital Light accounted nearly 60% almost reached our full-year goal for tech upgrading strategy. For our smart marketing product, ICE, Intelligence Credit Engine, the number of active users increased 74% Q&Q. The transaction volume and outstanding balance both went up by 36%. 大家也比较关心近期的监管动态,我们分享一点关于监管的看法。

As one of the 13 music platforms of April 29, we are very close and transparent in our communication with the management. The current revision work is going very well. We are deeply aware of the requirements and expectations of the management for the development of the industry. We are very focused on the overall business and are very clear about the rules. As for the recent regulatory changes, we want to share a few thoughts here.

As one of the 13 leading internet platforms on the April 29 regulatory meeting, we have maintained regular and close communications with regulators. Currently, the self-assessment and related rectification process are moving forward in an orderly manner. We fully understand the regulators' requirements and expectations for the industry. Overall, our business is relatively focused and has a clear path towards full compliance with regulatory requirements. We don't have online payments, online insurance, or online brokerage operation, which are subject to more restrictive regulations. For our loan facilitation business, we don't do joint lending, nor have over-leveraged ABS insurance. Thus, we are highly confident to satisfy all of the revised regulatory requirements when everything is set and done.

As for the truth-to-truth link issue, which is of high market attention, we will communicate with the supervision department earlier to clarify the direction of the policy and prepare in advance. We will comply with the supervision requirements and cooperate with the current personal truth-to-truth institutions. At the same time, we will seek to participate in the formation and establishment of

As you may already know, the proposed new regulation will not allow loan facilitation platforms to provide credit assessment-related data directly to financial institutions, and such data transfer must go in through a licensed credit agency. we have preemptively communicated with the regulators to understand the policy direction and to make necessary preparations. We will take multiple actions to satisfy this new regulation. On one hand, we can cooperate with existing third-party credit agencies. On the other hand, we can also seek partners to jointly launch a new credit agency.

For the market transfer, The overall financing cost of consumer technology companies is under 24%. We are mentally prepared for this. We have also made preparations in advance. Our self-employed and small businesses meet these requirements. For our residential businesses, according to strict pressure tests, the overall average price will drop to about 22 to 23% in the short term. This will have little impact on business and financial indicators for 2021. As of 2022, we expect the overall business to continue to grow healthily. The overall take rate can still reach about 3%. The positive effects of the price drop will also lead to the negative effects. The price drop will allow us to further open up to better customers. By connecting more large national banks and increasing the release of ABS, to further reduce capital costs and stabilize the source of capital. In addition, after the price drop, the risk of low-end products corresponding to high-quality customers will naturally decrease. We estimate that the risk of consumption of cotton will drop by 1% to 2%. At the same time, based on historical experience, the price drop will increase the movement rate, customer flow rate, and user life cycle. In summary, The price drop will lead to better customers and better financial institutions, which will increase the operating efficiency of our system as a whole. This increase may have a great deal of impact on the price decline of call. And it will have a better sustainability to accelerate growth and establish a good foundation for the future of 2020. Therefore, we are currently very optimistic about this matter.

Recently, some media reports indicate that regulators will require consumer finance companies to implement an all-in interest rate cap of 24% for consumer lending. This is consistent with the regulators' long-term agenda to support real economy by lowering financing costs for consumers and SMEs. This is also consistent with our long-term business planning. Our own balance sheet loan and SME loan business already priced below 24%. For our consumer facilitation business, even under a more restrictive stress test in which we assume to cut our price to below 24% rather rapidly, we do not expect the price cut to have a meaningful impact to our operational and financial results in 2021. As for 2022, it will be a transitional year when the entire industry will comply with the 24 rate cap by June end date. In our stress test, We continue to see healthy volume growth in 2022, and net take rate should be around 3%. There are also some positive factors that may mitigate negative impacts from the 24% rate cap. With lower price, we should be able to develop a partnership with larger national banks that typically offer more stable funding at lower funding costs. In addition, With all of our assets at 24% or lower, we should be able to significantly increase the insurance of ABS, which typically carries a much lower funding cost, around 5% to 5.5%, versus around 7% from banks. Furthermore, at lower prices, we can attract more high-quality borrowers, which will naturally drive down overall credit costs by 1% to 2% on an IR basis. Finally, based on our experience, lower pricing normally boosts the borrower activities, retention rate, and lifetime value . To conclude, we believe more prime customers and better quality financial institutions would come along with lower-priced products. This will ultimately enhance our operational efficiency and make our business more resilient and sustainable. Such changes may set up a solid base for us to accelerate its growth after 2022. We feel quite optimistic.

Our app is temporarily on sale, which is something that everyone is concerned about. The reason is that our technical staff missed out on some of the functions that the app monitoring department requires to be modified. The app that has been modified has been resold in major app stores. I would now like to address the temporary removal of our 360 Jietiao app from App Store.

The removal was due to our product engineer missed out one of the functions that was required by the regulators. We have already fixed the issue, and our app has been restored to all major app stores to date. We have conducted a thorough internal review and improved our operating protocol to ensure such incidents never happen again. Thanks to our diversified customer acquisition channel and a balanced product mix, the impact from app removal to our operation has been minimal.

On the business side, we continue to strengthen our multi-billion capacity in terms of funds and risks. The second quarter, ABS's release rate has increased rapidly, effectively reducing the cost of funds. In Q2, the new release of ABS assets is 21 billion, with an average interest rate of 5.3%. This year, we have a total of $3.4 billion in issuance, ranking fourth in the market. The risk segment has steadily supported more business lines. The overall risk has further improved, and the asset risk performance that we have combined has improved further. The Delinquency Ratio of 90 days has further dropped to 1.19%. The M1 recovery rate continues to remain at 90.8%. The Day One期率 continues to remain at 5%.

During the quarter, we continued to diversify our funding source. We accelerated the pace of ABS insurance with a total of RMB 2.1 billion ABS in Q2 at an average coupon rate of 5.3%. This has brought our total ABS insurance to RMB 3.1 billion so far this year, ranking us number four in the market. As our risk management system supports more business lines, we continue to see further enhancements of our asset quality. The 90-day-plus delinquency ratio across our platform was 1.19%. The M1 collection rate remained stable at 90.8%, and day-one delinquency rate at 5%. We and the Beijing Bank continue to expand our strategic cooperation.

As of June 2021, the total amount of funds was 3.35 billion yuan. Q2 has a balance of 20.4 billion yuan. Compared to Q1, the balance has increased by 60%. We expect the scale of our cooperation with the Capital to remain relatively stable in the future. The Capital Bank and we have great cooperation, flexibility, and trust. Through our cooperation with the Capital, we will actively explore new products and businesses.

We continue to expand the scale of our collaboration with KCB. Total accumulated loan facilitation volume as of Q2 was RMB $33.5 billion. Outstanding balance was RMB $20.4 billion at the end of Q2, up 60% from Q1. We expand the scale of the KCB partnership to remain relatively stable for the time being. we have deep-rooted trust and great flexibility in our collaboration with KCB. Going forward, we will proactively explore new products and business opportunities through our cooperation with KCB.

In terms of ESG, which has gradually increased market attention, we have actually done a lot of things. In July this year, the water disaster in Henan We made some good progress on the ES3 front, which drew more and more attention. When deadly floods hit Henan Province this July,

we took swift action to support by donating RMB 20 million through the 360 Foundation. Meanwhile, we organized the local team to join the rescue efforts.

Looking back at the first half of 2021, we are very satisfied. I believe this is not a coincidence. This is the result of a very good team's hard work. Here, I would like to express Thank you to the team. This is an era of change. History shows that great companies emerge from change. We have spent more than five years to prove that we are a team with such determination and such ability. We will continue to innovate and launch many products and services. Financial technology must be a world-class track. Financial technology will also deeply change financial services and user experience. Our goal is to become the leading company in this field.

Overall, we are quite satisfied with our performance in the first half of 2021. This fruitful result comes along from dedicated efforts of our excellent team. I would like to express my gratitude to their hard work. We are in a time of rapid changes, and great companies are always born in great change. We have successfully demonstrated our capabilities and ambition over the past five years. FinTech is a vast market with huge potential, and FinTech products have profoundly changed financial service landscape and user experience. We will continuously launch innovative products and are dedicated to become the premium player in this market. Now let me turn to our CFO Alex to run through more detailed info. Thank you.

Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our quarterly earnings call. For the interest of time, I will not go over all the financial line items on the call. Please refer to our earnings release for the details. As Haisheng mentioned, we delivered robust operating and financial results for the first half of 2021, powered by strong consumer demand for credit and further improvement in asset quality. The strong business momentum appears continuing into current quarter. In fact, we have seen record-breaking volumes in recent months, despite some reported softness of microeconomic activities lately. Total net revenue for Q2 was $4 billion versus $3.6 billion in Q1 and $3.34 billion a year ago. Revenue from credit-driven service capital heavy was $2.4 billion compared to $2.45 billion in Q1 and $3.08 billion a year ago. The year-over-year decline was mainly due to facilitation volume mix change, as capital heavy contribution decreased significantly. Revenue from capital flurries, capital light, was $1.6 billion, compared to $1.15 billion in Q1 and $259 million a year ago. The robust growth was mainly driven by exceptional progress we had made in Capital Light and other technology solutions. During the quarter, Capital Light and other technology solutions contributed roughly 56% of the total loan volume, while the underlying take rates were relatively stable. We expect Capital Light contribution percentage to continue to increase in the second half and to reach roughly two-thirds of our total volume by the year end. During the quarter, average pricing was 27.2% compared to 26.6% in Q1 and 27.2% a year ago. Assuming the reported 24% rate cap guideline will be implemented across industry, we are expecting overall pricing to gradually trending down through mid-2022 to satisfy the rate cap requirement. In our stress test, even under the more restrictive and steep rate cut scenario, where we assume we cut the rate to below 24% starting from September the 1st. In In this scenario, we should still be able to maintain healthy growth and profitability in the transitional year of 2022 and resume to a more robust growth afterwards. As microeconomic activities picked up in China in the first half, demand for Internet traffic also increased significantly along the way. In addition, We also proactively accelerate the pace of customer acquisition in the last couple quarters to take advantage of the overall positive business trend. As such, we have experienced some uptake in sales and marketing expenses. Average customer acquisition cost on the consumer lending side for the quarter was about RMB 237,000. compared to RMB 206 in Q1. As we discussed in the past, average cost per approved credit line is a calculated number with limited value in our decision making. We will continue to use lifecycle ROI and LTV as key metrics to determine the pace and scope of our customer acquisition strategy. So far in 2021, healthy ROI trend have encouraged us to take a more proactive approach to accelerate the growth of our customer base. Non-GAAP net income was $1.61 billion in Q2 versus $1.41 billion in Q1 and $942 million a year ago. We once again set a new record in quarterly profitability driven by higher facilitation volume, and noticeable improvement in asset quality. Effective tax rate was approximately 18% for the quarter, sorry, for the first half of 2021. We see a similar level of ETR for the rest of the year. Longer term, we are expecting our normalized ETR to return to approximately 15%. As we move toward a more technology-driven business model, we continue to see marked improvement in operating margins, as increasing contribution from Capital Light and other technology solutions will generally lead to higher margin structure. Overall, we expect profitability growth to be more or less keep pace with the facilitation volume growth throughout this year. With strong operating results and increased contribution from CapLine model in Q2, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, further declined to 4.8 times from 5.4 times in Q1 and 8.3 times a year ago. We expect to see continued deleveraging in our businesses driven by further movement toward cap light and solid operating results. Total cash and cash equivalent was $8.8 billion in Q2 compared to $9.2 billion in Q1. Non-restricted cash was approximately $5.2 billion in Q2 versus $6 billion in Q1. The modest decline in cash was mainly due to more proactive deployment of cash in our operations to support ABS and pre-ABS assets, which generates higher returns. Meanwhile, a significant portion of our cash was also allocated to security deposit with our institutional partners and register capitals of different entities to support our daily operation. As we continue to generate strong cash flows through operations, We believe our current cash position is more than sufficient to support the expansion of our business, to invest in key technologies, and to satisfy potential regulatory requirements. Therefore, we believe it is a prudent decision to use some of our quote-unquote free cash to invest in our own stock, which is priced just around the company's liquidation value. For a company that is still generating healthy growth for the next few years, we believe it is a great bargain. Finally, let me give you some update about our outlook for 2021. The operating results for the first half of 2021 were very encouraging, and the momentum doesn't slow so far in current quarter. Although we intend to keep our traditional conservative approach in providing forward guidance, the numbers start to speak for themselves. As such, we would like to raise our 2021 total loan volume guidance to be between RMB $340 billion and RMB $350 billion, compared to previous guidance of RMB $310 billion and $330 billion. The revised guidance represents year-over-year growth of 38% to 42%. As always, this forecast reflects the company's current and preliminary view, which is subject to material changes. With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

Thank you, management. Ladies and gentlemen, if you would like to ask a question to the management, please press 01 on your telephone keypad. To cancel, please press 02. For those who can speak Chinese, please kindly ask a question in Chinese first, followed by English translation. Our first question is from Richard and Morgan Stanley. Please go ahead.

Mr. Wu, Mr. Xu, thank you very much for your question. I have two questions I would like to ask first. First, Mr. Wu, you just mentioned that you are now actively communicating with regulators. During the previous period of termination, everyone has different expectations about the process of reformation. I don't know if you and Mr. Wu After the authentication, do we have any more specific solutions? How do we deliver the customer's information? Secondly, I would like to ask, in the process of communicating with the supervision, is the payment rate still relatively fast? Of course, our performance is indeed very bright. Our scale is actually not very large now. In this respect, is there any statement from the supervision? 我们业务确实比较这个简单,也比较干净。 那如果相对于这种的这个业务, 那对这个增速啊等等等等, 有没有一些的看法? Basically, two questions for me. One is on the basically sending foreign information through the credit scoring agencies. Any detailed discussion on the actual process? Because it's been a little while and You mentioned basically there's been further discussion. There's different versions out there. Just want to see what is the latest development on that front. Secondly, it's obviously very good loan volume. Any discussion with the regulators in terms of any views and window guidance on the pace at the proper pace? Thank you.

Thank you, Richard. First question. The true management method came out at the beginning of the year. Duan Zhilian is a simple statement drawn from this method. The statement itself should remain in the description of Duan Zhilian. So the specific approach you mentioned, we actually had a long communication with the supervisor. I believe the supervisor is also conducting extensive research in the industry. At the moment, we don't seem to have seen any specific method to promote it. Maybe it's still in the discussion of this new industry. Because we see that the time for the real change needs to be by the end of next year. So we have left enough time. So we think Duan Zhi Lian should still be in a joint industry exploration. As for Duan Zhi Lian, our student Zhen Yan has also done a lot of communication with the supervisor. Did Zhen Yan add any details?

Yes, Duan Zhi Lian is actually emphasizing that the big data Internet platform should use a real estate agency to carry out financial assessment data transmission. And the way to do it Of course, it is a request to set up a real estate company or to cooperate with existing real estate companies. In fact, in addition to this, we have a deep cooperation relationship with Jinsen Bank, which also provides us with a third solution other than the above two legal methods. But no matter which way we communicate now, it will not affect the wind control data model and the final wind control effect. But in different modes, the influence of the flow may be different. At present, in fact, the whole part, but this flow will not actually affect the final effect of the wind control data that I mentioned earlier. So in this whole part, no matter which mode we use, I think all three elements can fully meet the requirements of supervision. I will translate it for you.

Okay. So for the draft version of regulation on the administration of credit assessment business was announced, and we have been communicating with regulators for a long time. But actually, in the market, there is no standard solution available so far for now. And also as Mr. Zheng has mentioned that actually there are two or three solutions we can about. The first one is that we apply for credit lessons to launch a new credit agency. And the second one is we cooperate with existing credit agency to continue our business. Also with our in-depth cooperation with KCB, which offers us another alternative for this solution. Whatever solution we adopt in the end, the process of product might be different. However, it will not affect our results of the risk management and our risk models.

Okay. Regarding the second question, we are relatively fast in terms of monitoring. We see that monitoring for the entire industry needs to be standardized. um um um

So for your second question regarding to our growth rate, actually we have seen that the growth is not the problem and the regulators focus more on the standardization of the product and our business. Also, we have seen that in the requirements by the regulators, they have issued that they want the platforms, internet platforms, to sustain the growth and support real economy continuously.

Thank you.

Thank you.

Thank you.

Our next question is from Alexia at UBS. Please go ahead.

The collection of data collected by Internet companies will continue to be standardized. In the future, some more strict documents may be released. So I would like to ask if this will have an impact on our future, whether the data collected from our customers will need to be reduced in the future, and will it have a certain impact on our wind control. The second story is about how to meet the progress of the 24% interest rate cap. I just mentioned that under the stress test, we reached 24% in September. It looks like this is a stress test. What is our base case? What is our goal? This is the second question. The third question is related to the 24% rate. um um um um um um um I will briefly translate my question. First one is on the regulatory development. So it looks like the current direction from the regulators is to continue to tighten the aspect of the data collection by the internet companies. So I'm wondering, Assuming the regulators issue more stringent regulations on consumer data collection and use in the future, how would that affect our current practice of data collection and use? And how would that affect our credit model? Second question is on your plan to work complying with the 20% interest rate cap. So you mentioned that in your stress test you are going to comply, fully comply with the 20% cap by September. this year, but so stress testing was your base case or your target trajectory to work combined with that new cap. And then the first question is also related to the interest rate trend. So there are market concerns about the 20% cap is only just the beginning of the future regulatory requirement of further pushing down the overall lending rates. So I'm wondering if you have any comment on that. And specifically, given you're also ramping up your SME loans, so it looks like this segment will be subject to further pressure from lower rate window guidance. Also, we appreciate your comments. Thanks.

Thank you. The first question is about the restrictions on data use. This trend, as you said, is happening. This year, it will be more strict than before. Our judgment on this matter will concern several aspects. The first is that all types of businesses must follow the minimum requirement to acquire data. As a financial technology platform, we have been adhering to this principle for a long time. We only to obtain data related to financial data. At the same time, we will also cooperate with various standardized platforms in the industry and with real estate agencies, and try to include some external data into the real estate license to provide services for us. Therefore, we have already followed the minimum necessary principles directly with the data obtained from users. The data we use to cooperate with the industry will be obtained in the form of real-life photos. So, in the first principle, we don't think there will be too many problems. The second principle I think he cares about is how to obtain user data. Whether it is approved by the user, whether it is mandatory for the user not to give the data and not allow it to be used. We think that in terms of methods, in the past, or seriously require us to comply with the protocol requirements and negotiate with the users. In this direction, we believe that the platform needs to pay more attention to the fact that the price of our app is related to this entry. In addition, the rapid recovery of the price of our app It also shows that our current operation has met the requirements of supervision. However, the platform will still use higher standards to ask us to comply and use this data. We believe that the strict self-demand that we have always had In the future, under a more strict monitoring environment, our work will have a very controllable impact on the business.

Okay, thank you, Alex, for your question. So regarding to your first one that we actually we see it happening as well about the data capture and usage in this industry. So for regulator size, we think there are two basic principles. The first one is the minimum standard for data capture. So apart from capturing data from the customer side, like for customer forms or application, we are working proactively with third party credit agency for industry and external data sources as well as replacement. And the second principle is that the customer authorization is mandatory before data capture. As you may know that our removal of our 360 Xietiao application from app stores was caused by these problems. So we will emphasize more on this principle in the future. We believe that with our relatively standard process and the impact of these tightening principles, we'll have minimum impact on our business.

The second question is about the 24-day cap time table. The market situation in the industry is not particularly consistent. Some demand that the balance be spent by June next year. Some demand that the balance be spent by June next year. Some demand that the balance be spent by June next year. Some demand that the balance be spent by June next year. Some demand that the balance be spent by June next year. Some demand that the balance be spent by June next year. Some demand that the balance be spent by June next year. Regarding to your second question, the timeline of the all-in interest rate cap of 24%.

Actually, we say that there are different timelines for different institutions. Some institutions will follow the guideline that the outstanding balance of the loan over 24% will be reduced to zero by end of June next year. And some institutions follow the guidance that there will be no new originations by June next year. So we will follow this accordingly.

The third question is whether the price of Cap24 will continue to fall. We believe that Cap24 is not a new thing, nor is it a new line. In fact, in the industry, we have seen many banks pursuing Cap24 standards a long time ago. This time, the company has made a contractual contract with the rest of the financial institutions. Therefore, we believe that 2024 will be a relatively stable line for the industry in the long term, regardless of the past or the future. We also believe that the financial supervision department's consideration for the seriousness and continuity of interest rates will continue to exist as the principle of supervision in this industry. Therefore, we do not think that there will be a big change in this matter from the practical and continuous level of supervision.

Regarding to your third question that if the 24 interest gap will be lowered more, actually as all market participants know, 24% interest gap has been the window guidance from regulators to banks for a long time. Recently, media reports speculate that this interest cap requirement extends to consumer finance companies. Since the 24% cap has existed in the industry for quite some time, we don't think the rate cap will further go down. Thank you for your question.

Although Xiaowei's hope is that the lower the better, there is no unified standard for how low it is. Xiaowei is actually similar in terms of service to consumer finance. It also exists in different customer groups. Its common sense is different. So we believe that there will also be Because of the different supply and demand, there is a possibility of diversification. As a platform company, we will be more in the middle to meet the different supply and demand. And I also believe that the management can see the need for this industry. Thank you.

And furthermore, regarding to the interest rate of SME loans, of course regulators want to say the interest rate to be as lower as possible, but there is no standard. As it is similar to the consumer finance industry, there are different and various needs and supplies of the SME loans. As a platform, as intermediary, we will continue to offer the various services to meet different kinds of needs of the SME loans.

Thank you. Thank you. Thank you.

Our next question is from Jackie Chu at China Renaissance. Please go ahead.

Hello, Mr. Guan. Thank you for the opportunity to ask me a question. Congratulations to the company for achieving a very strong performance. My first question is about supervision. As Mr. Wu mentioned, after we do the pressure test for this 24% interest rate, the margin may drop to about 3% next year. I would like to ask, what is our view on the cost of APR, funding costs, and other credit costs? Will we have a look at the level of APR in the third quarter? The second question is about the new business of SME. We can see that many competitors So let me translate. So congrats for these strong results. My first question is related to regulation as well. So for the 24% interest rate cap, management gave a stress test for next year regarding the margin. Probably will go down to 3%. So just want to understand what is our assumptions behind this stress test regarding to APR funding costs and credit costs and other expenses and any chance we can give an outlook for APR in the third quarter. And second question is regarding to the SME loan. We've seen other competitors also move to this new business. So how are we going to differentiate our SME loan products? And what is the APR margin and our growth target this year? And is this SME loan included in our new loan volume guidance? Thank you.

第一个关于二次Tag Rate会下降的问题, 我们现在对这个Tag Rate下降做的测试 是相对禁止的一个测试。 就是假设我们在所有 without an increase in efficiency, due to a decrease in interest rates, it directly leads to a decrease in take-aways. What do you think of the cost assumption? In other words, our cost assumption remains the same. It remains the same as before. This also leads us to the possibility of an increase in take-aways in the future. It is because of the cost that we assume will not change. Under new interest rates, it has a lot of room for improvement. For example, the capital cost. Due to the fact that in the past, more than 20 years, we have taken over a lot of small and medium-sized companies, and the size of A-B-S issuers in more than 20 years will not be too large. On the other hand, when it comes to more than 20 years, we can take over more of these shareholder banks and public banks. Its capital cost is often much lower than that of small and medium-sized companies, so it can provide a lower level of capital supply. In the future, we will have a significant increase in the size of our A-B-S issuance. The cost of A-B-S and other large-scale companies will be lower than the cost of our small and medium-sized companies. As a result of the arrival of A-B-S, our entire capital cost will drop by more than 1%. At the same time, our risk cost the rate will also drop by 1.2%. So in the end, we can see that our major costs, including the life cycle of our customers, are getting better, because the flow rate is getting better. After the price drops, its annuality will be better. So in terms of our major costs, we should be able to have a relatively obvious room for improvement. So it will have a very positive effect on our 3% decrease in take away.

Thank you, Jackie. Regarding to your first question about the stress test, actually what we have delivered now is a relatively static test with all other factors status quo, especially there's no improvement in our efficiency. So we estimate there's no cost changes in this version of the stress test. However, as we have known that there is a few improvements of our cost, For example, for our funding cost, before we have a large portion of our funding from consumer finance companies with a relatively higher funding cost, and our ABS volume is also limited. However, with a lowering cap interest rate, we can have more funding from national banks or larger national banks, and we can increase our ABS volume. So we expect our funding cost to be lowered by 1%. And we have quite a lot of expectation to be lowered by around 1% as well. For another major cost, the customer acquisition cost will be lowered as well. So we expect that actually the tick rate of 3% will be improved in the future.

Q3, is our API down? Today is already Q3. We are actually taking some actions to take the initiative to do some downgrade tests. So, in terms of Q3, we can see that there will be some up and down adjustments in the API. But we think that it will also have a very, very small impact on finance within the relatively predictable range.

For the third quarter of this year, we have started the lowered APR test. So the APR will be lowered, but there will be no meaningful impact on our financial results of the next quarter. 第二个关于SME的竞争优势, 我们认为我们在这个业务上的竞争优势还是相当之大。 第一,我们今天所做的这个,

Our SME business today, as we said before, our wind control engine has a double engine behind it. Because we see Xiao Wei's object as a natural person and a manager at the same time. So our building today seems to be 250,000. It will be much smaller than the traditional Xiao Wei, much bigger than the consumer finance we used to do. So it falls within our ability circle. When it becomes a natural person, it falls into the risk logic of our consumption control. We have a very, very big advantage in this area of history. So our small and medium-sized risk control ability is able to greatly take advantage of the risk control ability we have accumulated in our consumption control. This is our most fundamental difference between the two. The second is that we Today, in China, there are three platform companies that can be relatively flexible as the first shareholder of the Internet Bank to carry out in-depth cooperation. The bank has a great advantage in terms of capital costs and data-related access to risk control. As China's only third-largest platform company, we should say that we have a wide range of barriers and financial risk control in our small business. This is something that we don't think we can see in many of the major market manufacturers that have entered.

So for your second question, regarding to our competitiveness of SME loans, so there are two aspects. The first one is about risk management. Our SME business is different from the traditional ones because we focus more on the MSE side. Considering that traditional SME loans are over 10 million TK size, it's not fully data driven. However, we have adopted a dual engine regarding to our risk management about SME loans. That is, we evaluate from the individual side and from the corporate side. With ticket size of 250,000 on average, we have used and fully utilized our accumulated experience on risk management in the past years on consumer fund lines. And the second advantage of us is the cooperation with KCB. As the only three platforms in China market that are able to have in-depth cooperation with banks, we believe we have advantage of data and funding cost. regarding to the SME business. So for our target of S&E loans this year, it will account for around 10% to 15% of our total loan origination, and it has been covered in our guidance.

Okay, Jackie, just I have a few sort of a clarification and add up to Mr. Wu's comments there. Number one, the most important clarification that 3% is not a margin. It's the take rate, right? Our net margin this quarter was 40%. And if anything, for the next couple quarters, we'll probably see a little bit expansion of net margin than this Q2. So the 3%, though, is the take rate on loan balance. We have been saying this in the past. And then secondly, Also, regarding the second half pricing trend, even though our stress test was taking a more drastic cut starting from September 1st, basically on that day, everything goes below 24. But in reality, that's not going to be the case. Just like Haisheng mentioned, it's really dependent on the pace of our financial institution partners. They're kind of a progress there. So most likely it will be a gradual trending down toward that kind of a goal by the end of June of next year. So if you do a linear kind of a distribution on any given quarter from now to the middle of next year, you're probably looking at maybe one percentage or a little bit over one percentage point change in pricing if you just average out. So that's regarding the pricing change. And then this kind of a change for 2021, for the remainder of 2021, we don't see any kind of a meaningful impact in both loan volume or the take rate. That's why in my prepared remarks, I mentioned that the second half probability will most likely keep in pace with the loan volume growth. you have our guidance for the full year, you can do the calculation, roughly get the calculation, sorry, the probability number for the second half. So that's another clarification. Then the third point is really about how do we get that 3% take rate when this whole thing is said and done. I have a kind of an envelope calculation. Let's assume our current mix in terms of cap light versus cap heavy at 60 versus 40, 60 being the cap light. And normally, the reality is our cap light side of business carry a higher pricing versus the cap heavy. So if we, let's say, cut all the pricing to 22.5%, Then on the cap-heavy side, we need to cut roughly about 2%. On the cap-light side, we need to cut roughly about 6.5% to 7%. But keep in mind that 6.5% to 7% cut is actually the overall cut. Remember, we are only taking 30% of that sharing. So 6% to 7% cut to us is only 2% in real impact. right? So essentially the cap light and cap heavy, basically you have a similar 2% impact just by the pricing alone. That's a pre-tax impact. If you add the tax rate on it, the net impact on the pricing alone will probably be somewhere around the 1.7, 1.8% maybe. Okay. So that's a pricing alone. And then you know, forget about the funding cost savings, the operational efficiency, and all these other things. The one clear change will be the risk factor, just simply because when the pricing coming down, you are naturally targeting a high-quality group of users. Okay. For that, by our estimate, the savings from after-tax savings from that sort of credit cost side will be coming somewhere around 0.6% to 0.8% range. So if you deduct the pricing impact, 0.6% to 0.8% from the 1.7% to 1.8%, you get roughly 1%. That's not even considering anything on the funding cost, on operational efficiency, and all the other things we actually mentioned earlier. So that's the very rough calculation just for your reference. That's very clear.

Thanks, Carlos.

Thank you. Thanks so much. That's the end of the Q&A session. I would like to hand it back to management for briefing closing remarks.

Okay, thank you everyone again to join our conference call. And if you have any additional questions, please feel free to contact us. Thank you.

Thank you.

Yes, that's the end of the conference call. You can hang up.