Qifu Technology, Inc

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

Thank you. Hello, everyone, and welcome to our Third 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 earnings 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 discussions of certain non-GAAP matters. Please refer to our earnest release for our reconciliation between non-GAAP and the GAAP ones. Last, unless otherwise stated, all figures mentioned are in RMB. I will now turn the call over to our CEO, Mr. Wu Haisheng.

Wu Haisheng. Hello, everyone. I'm very happy to share our record with you. Since last year's epidemic, we have updated this record for the sixth consecutive quarter. Q3 single quarter has reached 97.6 billion through our platform, and has again reached a new high. The same rate has increased by 48%, and the same rate has increased by 10%. The revenue has quickly increased to 13.34 billion. The same rate increased by 58%, and the same rate increased by 13%. In terms of finance, Q3 2021, the total income reached 4.6 billion RMB, and the same rate increased by 25%, and the same rate increased by 15%. Non-GAAP net profit reached 16.3 billion RMB, and the same rate increased by 27%, and the same rate increased by 1%. I want to say that the world is changing very quickly, and there are many points of view. We have been using the results of continuously creating new records to respond to Hello, everyone.

I'm very happy to report another strong quarter. This marks the sixth consecutive quarter of record-breaking results since the pandemic last year. During the quarter, total loan facilitation volume reached RMB 97.6 billion through our platform, marking another record high. 48% year-on-year and 10% Q&Q. Outstanding loan balance reached RMB 133.4 billion at 58% year-on-year and 13.13% Q&Q. Total revenue was RMB 4.6 billion in Q3 at 25% year-on-year and 15.15% Q&Q. Now get net income with RMB 1.63 billion at 27% year-on-year and 1% Q&Q. We are in a fast-changing world and the market hot topics come and go. Our response to all of that is to consistently deliver record-setting results quarter after quarter. We believe this fully demonstrates strong resilience of our team and the business.

We got a lot of questions about recent regulatory development. We have maintained close dialogue with regulators in recent months. So let me first share some updates here. 关于14家互联网平台的整改。 This is the main line of work of this year's financial technology company. Most of the problems are required to be completed by the end of this year. Just as the Chinese People's Bank Party Committee Secretary, Chairman Lin Maojian, Guo Shuxing said on October 19, 2021. In the reform of the 14 exchange platforms, the financial management department has proposed 3,000 questions in advance. Most of them have been actively responded to, and about half have fallen. This year, we will achieve a more significant real-time progress. Compared to those cloud-based platforms, we have no payment business, no multi-faceted financial business, and no complex and complex financial scenarios. Our business model is very simple, and there are few problems. We are actively advancing according to the timetable, and we are optimizing company management, organizing relevant signs, and optimizing user experience. As the end of the year approaches, we are full of confidence in completing this work.

Rectification is the top priority for the 14 leading internet platforms summoned by regulators earlier this year. Majority of the issues have to be addressed by the end of this year. On October 19, 2021, Mr. Guo Shuqiong, CCP chief of PBOC and chairman of CBIRC, stated publicly, in the process of rectification of the 14 leading internet platforms, regulators raised over 1,000 issues. We have received a proactive response for majority of the issues, and about half of the issues have been resolved. As such, we anticipate more substantive progress by the end of this year. Compared to other platforms with financial holding company structure, we don't do payment business, nor do we offer a sophisticated one-stop financial service. Our business model is rather simple and straightforward. Thus, we have far fewer issues than most other platforms. Currently, we are progressing based on the regulatory timeline. This includes enhancing corporate governance, adjusting operations under various licenses, and optimizing user experience, etc. We are very confident to complete these compliance-related items by the regulatory deadlines.

Regarding the cut-off period, we have a very close communication with the management. We have also prepared a number of solutions to consider different scenarios. On the one hand, we are going to further exploit our current financial pipeline advantage. We also have enough capital and can consider increasing the investment capital of our own pipeline. If we actively explore the cooperation model of financial technology companies and personal real estate companies, this kind of work will be more complicated and the period given by the management will be longer. The third is that as one of the leading financial technology companies in Shanghai, we actively participate in the recruitment process and apply for relevant jobs. The fourth is that we will consider cooperating with our strategic partner, Jincheng Bank, to discuss the Duan Zhilian project. I think we may be the most well-prepared company for Duan Zhilian. We have enough hands to carry out this work.

As for new regulations related to credit agencies, we have been in close communications with regulators and prepared multiple proposals to cover different scenarios. First, we can further leverage various financial licenses on hand, and we also have sufficient cash to inject capital into our licensed entity if necessary. we can actively end discussion with existing credit rating agencies to explore potential business arrangements. Of course, this is a rather complicated process from both operational and technology perspectives. That's why regulators give a rather long grace period. Third, as a leading fintech company in Shanghai and a national one, we will also proactively participate in applying for a new credit agency license. an opportunity to present. Fourth, we will continue to work with our strategy partner, KCB, leveraging the banking license. As you can see, we have multiple solutions to satisfy this requirement of new regulation, and we might be better prepared than most other peers.

Regarding the pricing, there was a financial institution that was instructed by the Ministry of Finance to require interest rates Some financial institutions have been window-guided to lower their APR to below 24% by next June. We have proactively communicated with our financial partners

to drive down prices on our platform. Our average pricing in Q3 dropped by more than 1% compared to Q2. As for October, more than 60% of loans from our platform were priced below 24%. Going forward, we will continue to lower our average pricing in an orderly manner to make cap 24% by Q2 next year. Meanwhile, the hedging benefits of lower prices are gradually showing. We start to attract better quality customers and larger financial institutions. New customers' risk profiles appear better than existing ones. Meanwhile, our operational efficiency is also enhancing.

In terms of customer service, we are gradually increasing the customer service of small and large companies. The quality of our small and medium-sized customers is also improving. The revenue of our customers is also increasing by 3-4%. Today, we can no longer simply use a cost-to-performance ratio to look at our user acquisition efficiency. A higher quality, higher ROI, and more diversified customer base is being formed. At the same time, our in-house finance has maintained a very fast growth rate. More than half of the new consumer users in the third quarter are obtained through in-house finance.

In addition to consumer loan users, our SME and large ticket loan users have both grown nicely and the quality of our SME borrower continues to improve. Average credit line of SME borrower was up by 34% year-on-year. As such, CAC, i.e. Customer Acquisition Cost, is no longer a proper measure to evaluate our user acquisition efficiency. we have established a more diversified borrower matrix that has better quality and higher ROI. In addition, our embedded finance API model continues to grow rapidly and maintain leadership position. In Q3, more than half of our new consumer loan borrowers were acquired under this model.

On the funding front,

We will gradually expand our collaboration with national banks and a diverse beyond consumer finance company and urban commercial banks. Currently, we have a number of national banks in our pipeline, including Everbright Bank, Zheshan Bank, and Pudong Development Bank, among others. Expanding relationship with larger national banks will provide us with more stable funding source at a more attractive cost. In Q3, our overall funding costs remain at around 6.7%, near historical low.

In addition to monitoring the problem, I would like to continue to share some of our strategic progress. First of all, it is about our technological strategy. In the third quarter, our green capital ratio has further increased to 56.8%, close to our original set annual goal. to provide smart marketing services to financial institutions. We have continued to expand our business. We have launched more innovative products for different clients. Our turnover in October and March increased 53% compared to June. In terms of customers, we conducted A-B testing in some channels and upgraded our smart marketing model. The data shows that in some channels, we used almost the same cost and obtained a turnover of 22% higher than before. We will continue to promote this test to expand to all channels to acquire higher-quality technology. In the field of patenting, we have successfully acquired patents in the field of joint learning, perception recognition, and anti-theft technology. We have already announced more than 900 financial technology patents. We have won the Asia Bank of China's Announcement of Technology Awards for three consecutive years. This year, we won the China Annual Anti-Theft Technology Activity Award. Next, I would like to share some strategic developments. First, for the tech-driven transition strategy, loan facilitation under the CapLite and other tech models increased to 56.8% in 2003.

close to our full-year target. Our smart marketing products, ICE, intelligence credit engine, continue to grow with more innovative products rolling out. Transaction volume under ICE in October increased by 53% compared to June. For our customer acquisition system, we are piloting upgraded smart marketing models on some channels, And the A-B test data shows average credit line rather increased by 20% per dollar we spent. We will continuously progress the test run and apply to more channels to obtain better quality customers. We have received patents and have outstanding patent application in several cutting edge areas, such as federated learning, perception and recognition, and the bionic technology. So far, we have fired over 900 patent applications in FinTech-related areas. Recently, we have received multiple awards from the Asian Bankers three years in a row. We won the Best Risk Data and Analytics Technology Implementation of the Year in China, the Best Broad Prevention Technology Implementation of the Year in China, Best Digital Lending Service in China, Among FinTech companies, we had the most awards in the most categories for 2021. 关于小微的战略,小微业务这个季度继续稳健增长。 我们Q3受信了80亿,季度环比增长达到13%。 我们这个季度不断地打磨流程,推出了创新的产品。 一是我们发挥我们的科技优势,显著提升小微客户的用户体验。

Within 10 minutes, we reached more than 30% of the market share. This experience made our product a very obvious advantage in the market. Secondly, we further formed a deep cooperation mechanism with the bank to open up the business model of silver and silver interaction, and continued to make breakthroughs in the field of corporate authenticity and supply and demand. Thirdly, we continued to expand the scale of our small and medium-sized customers. The customers of our small and medium-sized team have reached 20%. Through the small and medium-sized team, Our SME business continues to deliver solid growth in Q3. Total amount of new approved credit lines increased 13.13% Q&Q to RMB 8 billion.

We are constantly refining our business process to roll out more innovative products. For example, we leverage our technical strength to improve borrowing experience. More than 30% of SME owners receive their credit line within 10 minutes. Better user experience gives us a clear competitive edge in marketing channels. We also established the process for the bank and the tax interaction model a financing channel by which banks provide loans to SMEs based on their historical tax payments. We also make breakthroughs in corporate credit rating and credit approval. Last but not least, our offline direct sales team continues to ramp operations, and it contributes about 20% new customers in Q3. Our team can access better quality first-hand customer information to fit in our risk models With these measures, we have gradually built up our competitive strength in S&E Finance. In terms of risk management, funding, user acquisition, and products.

As a leading financial technology company, we put ESG work as one of our important strategies. Under the guidance of China's Small and Medium Enterprises Association, we collaborated with Jinjie, Nuonuo, Yongyou, Baiwang, and many other joint partners. We launched the Shanchao Dai, I think this is also for us

As a leading fintech company, we regard ESG as a key component of our long-term business strategy. Under the guideline of China Association of Small and Media Enterprises , we have launched joint loan products with over 100 partners, including Jindie, Nuonuo, Yongyou, and Baiwang. These products serve different industries, including supermarkets, suppliers, and logistics. Meanwhile, we announced in November the special SME month, during which we target to waive RMB 10 million worth of interest for our SME customers. To support China's carbon-neutral commitment, we have rolled out consumer loans for electric vehicles. In addition, The World Economy Forum recently awarded us New Champions Community Award of Excellence in Agile Business Governance 2021. We are especially honored to be the only company in Asia to have received this award this year. This speaks to our increasing impact and commitment to social responsibility and corporate governance. 最后关于四季度的指引方面。

Finally, a note on our guidelines for

Q4 is already the middle of November. Based on our yesterday performance and the business momentum so far this year, we are confident that we will deliver a solid Q4 and exceed our previous four-year long volume guidance.

好,下面请我们CFO Alex给大家带来更多的数据。

Okay. 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 details. As Haisheng mentioned, we delivered the sixth consecutive quarter breaking record-breaking quarterly results in both operational and the financial terms for the third quarter of 2021 in a relatively muted micro backdrop. We saw continued strong consumer demand for credit and stable asset quality. Our faster than market growth suggests that we continue to gain shares in the target segment. Total net revenue for Q3 was $4.6 billion versus $4 billion in Q2 and $3.7 billion a year ago. from credit driven service capital heavy was 2.62 billion compared to 2.4 billion in Q2 and 2.96 billion a year ago. The year over year decline was mainly due to facilitation volume mix change as capital heavy loan volume decreased significantly. Meanwhile, capital heavy facilitation revenue take rate improved modestly quarter on quarter. Revenue from platform service Capital Light was $1.99 billion compared to $1.6 billion in Q2 and $748 million a year ago. The robust growth was mainly driven by continued progress we have made in Capital Light and other technology solutions. During the quarter, Capital Light and other tech solutions contribute roughly 57% of total loan volume. And Capital Light facilitation revenue take rate also improved nicely. During the quarter, average pricing was 26.1% compared to 27.2% in Q2 and 25.9% a year ago. As the 24% rate cap being implemented across the industry gradually, we are expecting average pricing to trend down by about one percentage point each quarter through mid-2022 to satisfy the rate cap requirement. As we discussed in the past, even under a more restrictive and a steep rate cut 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. During the quarter, we continue to maintain healthy pace of customer acquisition while focusing on attracting high quality borrowers. In particular, we significantly increased the number of customers with much larger credit line and relatively low risk. The average ticket size of these type of customers typically runs between 150,000 to 200,000 RMB compared to the average of 10,000 RMB for quote unquote regular borrowers. As such, on a blended basis, average customer acquisition cost, which is calculated by dividing the sales marketing cost with the total new credit line users. Customer acquisition cost per user with approved credit line was RMB 305 in Q3 compared to RMB 250 in Q2. Excluding large ticket size customers in both consumer and SME market, average cost per proofed credit line was approximately RMB 249 in Q3 compared to RMB 224 in Q2. As we discussed in the past, average cost per proofed credit line is a calculated number with limited value in our internal decision-making process. 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, we have maintained healthy ROI and LTV trends, which in turn drive stable net take rate. While overall risk metrics were relatively stable in Q3, we continued to take prudent approach in booking provisions against potential credit loss. New provision for contingent liability for loans originated in the quarter was approximately $1.5 billion. Meanwhile, approximately 800 million of provisions for contingent liability of previous period loans was written back as actual performance of those loans was better than expected. Provision booking ratio, which is defined as new provision for contingent liability divided by capital heavy loan facilitation volume, remained stable. With strong operation results and increased contribution from capital light model, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, further declined to 4.3 times in Q3 from 4.8 times in Q2 and 7.4 times a year ago. We expect to see continued deleveraging in our business driven by further movement towards capital light and solid operating results. We generate 1.74 billion cash from operation in Q3 compared to 1.3 billion in Q2 and 1.42 billion a year ago. Total cash and cash equivalent was 7.6 billion in Q3 compared to 8.8 billion in Q2. Non-restricted cash was approximately 4.2 billion in Q3 versus 5.2 billion in Q2. The 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. As a result, during the quarter, unbalanced loan volume increased to $12.8 billion from $9.8 billion sequentially. Meanwhile, a significant portion of our cash was also allocated to security deposit with our institutional partners and registered capital of different entities to support our daily operations. As we continue to generate strong cash flow from operations, we believe our current cash position is more than sufficient to support the growth of our business, to invest in key technologies, and to satisfy potential regulatory requirements. Therefore, yesterday, our board of directors approved a quarterly dividend policy and declared our first-ever quarterly dividend of US dollar 28 cents per ADS for Q3. Going forward, we will distribute approximately 15 to 20% of quarterly net income after tax in the form of cash dividends on a recurring basis. We believe it is appropriate way to generate additional return for our shareholders and to appreciate their long-term support. Finally, let me give you some update about outlook for the fourth quarter. The operating results for the first three quarters of the 2021 were very encouraging, and then we continue to see healthy business development in Q4, despite some seasonal headwinds and muted micro conditions. As such, we now expect Q4 total loan volume to be between RMB 90 billion and RMB 100 billion, which bring our 2021 total loan volume guidance to be between RMB $350 billion and RMB $360 billion compared to previous guidance of RMB $340 billion and RMB $350 billion. The revised guidance represents year-on-year growth of 42% to 46%. As always, this forecast reflects the company's current and preliminary view, which is subject to material change. With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

Thank you, management. We now begin question and answer sections. If you have questions, please press 01 on your telephone keypad. If you need to cancel, please press 02. For those who ask To ask questions, you can use Chinese. Please kindly ask your question in Chinese first and followed by English translation. In addition, in order to have enough time to address everyone on the call, please keep to one question and one follow-up and then return to queue if you have more questions.

And our first question is Luca Chu from Mocken Stanley.

Hi, Mr. Wu, Mr. Xu, hello. I'm Morgan Stanley Richard. I just want to ask, Mr. Wu, you just mentioned that we now have under 24% of our loan amount. Can you analyze the current 60% take rate, risk situation, and some of the take rate? This may also help us to understand the future of a company that can fall to under 24%. My question is, basically, the management mentioned that, you know, there's 60 percent of loans already priced at below 24 percent. What's the growth and net take rate and risk profile of these client base? And that will give us probably better indicator of the profitability after the transition period.

Okay. Thank you, Richard. From the point of view of Tegra, the assets below 24 are down by about 1%. From the point of view of risk, I'll talk about it later. The data we see is that the risk of the trade we added to Q3 is much better than that of DaPan. DaPan's interest rate is about 5.1%. I will translate for our CEO, Hai-Shen. First, thank you, Richard, for your question. I will give you some color about this tick rate. Number one, for the net tick rate, the asset below 24% is 1% lower than our current

total loan book, which is 3% net tick rate. Secondly, as for the risk profile of this 24% cap asset, what we observe is in Q3, the new transaction has better risk performance than the existing asset. For example, in the day one delinquency risk metrics, the new transaction is 4.2%. and the total loan book is 5.1%.

There are some small changes in the current risk. For example, the overall risk of the big market is that the risk of the big market is at 5.1, which is slightly higher than the level of Q2. The 30-day recovery rate has dropped slightly to below 90%. This is a small drop. Overall, such changes uh uh For the current situation, in Q3, including October, our risk team and the customer team actually made a lot of active adjustments, including a few aspects. One is the customer side. We have achieved a frame upgrade of the model of a smart marketing system. From the original idea of increasing efficiency and cost, to the idea of increasing the quality and cost of the customer, In this case, for example, our RTA customer model ratio has increased by more than 40%. And this quarter, the user quality and user acquisition efficiency have been optimized by the Play mode respectively. The user quality selection ability has increased by 17%, and the customer efficiency has also increased by 20%. As Mr. Hai mentioned earlier, with the same cost, we got a 20% increase in the number of customers. In terms of risk assessment, we made some risk assessments in advance for the potential risk groups. We used the platform-based GBS-T and other advanced algorithmic models to accurately identify risk-sensitive people and made some targeted strategy searches for these groups. In addition, we have also increased the mining capacity of some high-end customers. We used the data of RenHong 2.0 and other external data to do some mining. At 4 o'clock, we started to do some competitive strategies for these high-end users, while reducing the price, to meet the consumer's consumption and business needs, to achieve the effect of transferring the balance to low-risk customers. So, in the end, we are showing the risk of new transactions that Hai Zhengzhong mentioned in the beginning. In September, the risk of new transactions has dropped to 4.2%, which is lower than the average rate of return on the first period of a new transaction. Yes, in short, we are very confident in controlling the risk in the future with the continuous goodwill of our customers and the continuous optimization of strategies. This is my supplement. Please, Luya, help me translate it.

Okay, to add a little bit more, in the meanwhile, we have seen that there's a little bit fluctuations in risk performance. For example, the D1 delinquency rate has declined for five consecutive quarters, while it is 5.1% in this quarter. slightly higher than the second quarter, and the 30-day recovery rate decreased slightly from 90% Q2 to less than 90%. However, we're confident to say that such changes are very controllable. We believe such changes are caused by the cyclical factors as well as regulatory policies, but they are short-term and temporary and have relatively little impact on our customer base. At the same time, our customer acquisition team and risk management team have made some changes proactively, including, firstly, for customer acquisition, we have improved our intelligent marketing strategy. We changed from improving efficiency and controlling cost to improving quality and controlling cost. Taking information flow channels as an example, the proportion of RTA customer acquisition model has further increased to more than 40%. In this quarter, the Pre-A model was optimized focusing on user quality and user acquisition efficiency, in which the user quality screening ability was improved by 17% and the user acquisition efficiency was improved by 20%. So, as Hashin has mentioned before, with the same customer acquisition cost, we are able to increase the credit line by 20%. Secondly, for potential risky customers, we have started risk reduction strategy in advance. We make full use of our self-developed advanced algorithm models such as GBST to accurately identify risk-suspectable groups and tighten risk management accordingly. For example, for people borrowing from multiple platforms, we have lowered approval rates. Thirdly, for existing used customers, we reduce prices while matching users' consumption and business revolving needs, so as to achieve the efficiency of transferring balance to lower-risk customers. Eventually, as Haisheng has mentioned, we can see the risk for new transactions is decreasing, Taking the first retainment of new loans in September as an example, the delinquency rate decreased to 4.20%, which is lower than the average of the second quarter. In short, with the continuous improvement of our customer base and optimization by risk management, we are very confident to keep the risks within the expected range in the future.

Richard, do you have any follow-ups or we can move on to the next question? Just one quick follow-up. What's the overall, I mean, if you factor in the risks and client acquisition costs, you know, differences, you know, any overall guidance on sort of the net take rate for this client base?

Yeah. Well, let me take this one. We are still seeing the same logic as we mentioned after the second quarter results. If you recall, we have the sort of a stress test under the 24% scenario. Basically, we still see one percentage drop when everything being said and done. When the entire portfolio moved down below 24%, The average pricing will probably sitting somewhere around 22.5% and the next take rate will drop from 4% roughly to about 3%. That's still the outlook for the moment.

Okay. So it's consistent with our original estimates that the new data suggests, right? Okay. Got it. Thank you. That's right.

Yeah. Okay.

Next question is Joe Dali, CICC.

Hello, Director. Thank you for giving me the opportunity to ask this question. First of all, congratulations to the company for achieving such a bright future. I have a small question for the Director. It's still about a change in our future risk indicators. Maybe I can answer the question just now and ask the Director. This quarter, I see that most of our risk indicators have reached the best level in history. Okay, then I'll translate my question. A question is regarding the risk matrix. I see some of our risk matrix are near the best level in history during this quarter. I was wondering when we're looking forward, when the interest rate gradually declines and the lower origination continues increasing, Can we expect to see a better level of risk matrix, or is it what we can see now is almost the best we can do? Thanks, management.

Okay. Can you answer this question?

Yes, we have talked about the actions we are doing now. These actions will be done gradually in the future, but the entire adjustment process will actually take some time. When all these adjustments are completed, as the proportion of our new transactions gradually increases and the customer base gradually increases, the final risk will be significantly improved. So now is definitely not the best time in history. In the future, it will improve. But in the middle of this process, it will actually be affected by some periodical factors and political factors. So in this process, this data may have some short-term, small-scale fluctuations.

Okay, we will take some time for adjustment. So when the adjustment is finally done, we can say that as a proportion of new transactions and customers improved, eventually the risk performance will be improved. While during the process, there will be cyclical and regulatory policies change, so there will be a little bit fluctuations in the process.

Yadad, do you have any follow-up? No, thank you, Director. I don't have any other questions. Thank you. Thank you.

Next question is Alex Yee from UBS.

Good morning, Director. Thank you for giving me the opportunity. My question is about supervision. You mentioned at the beginning of the meeting that the company So my question is regarding the regulations. So in your prepared remarks, you mentioned about considering different options of the company financial license. Could you give us some additional colors on that in terms of what you mean? And we saw from the news earlier that one of the micro-loan licenses under QFIN has increased capital from $500 million to $1 billion. I'm wondering what's your consideration behind and is there any progress you have heard from the regulators about the national micro-loan license? And finally, so given the current regulatory progress or direction, have you considered a scenario where in the future your business model will need to be conducted through any kind of license.

Thank you.

Haijun, you're online?

Okay, sorry. Sorry, one minute. About this photo, we communicate with the supervisor more and more. Our understanding of the supervisor on this issue is that the first is that the financial technology company also wants to take a photo. The second is that it is necessary to take a photo. So from these two angles, our photo work will be divided into several aspects. The first is about taking a photo. We will think about it. We will actively take this true photo. um um um um um through two-touch-one-control rules, to make some requirements for platform companies. For example, we are currently controlling two stock insurance license plates. There is a possibility that we will be asked to withdraw one. Because the use of stock insurance license plates is mainly managed according to capital income, so if we withdraw one, it will not affect our business. So we can accept this job. This is what we hope to share.

Sure. Well, compared to other listed peers, we are one of the fewer companies that have direct dialogue with regulators. Therefore, we can proactively follow the regulatory guidance according to our first-hand information. Firstly, for the credit rating agency, we will participate actively in applying for the new credit rating license. Secondly, for the current existing financial license on hand, we will now consider carefully to inject capital into the licensed entities. Of course, we have abundant capital reserve to inject. Thirdly, according to the regulator requirements for the financing company, nowadays we have shareholders in two guarantee companies. In the discussion, we might need to exit from one guarantee company, but there will be very muted impact to our operation.

Yeah, sorry, I want to get a little bit of clarification on this. So we currently hold two financial guarantee licenses. And according to the new regulatory guideline, for any entity, you can only hold one. So we will, in the future, consolidate two into one license. And because this license Basically, the business is driven by the registered capital of the license. Essentially, we just need to move the registered capital from one license to another. From the scale, in terms of scale, the business we can do with this license, there's no impact because it's based on the registered capital. That's just one add-up to that. Haisheng, you can continue. Okay, thank you.

About what you asked, is it possible for the company to entrust a company to develop a business? I would like to divide our business into two dimensions to look at the issue of accounting. The first is the self-employment business, and the second is the home loan business. In terms of self-employment business, we will use the future home loan small loan accounting and the mortgage insurance accounting as an advantageous accounting. Small loans can develop self-employment business, and mortgages can also develop self-employment loans, and financial institutions can also develop it. Both are possible. And they are all nationwide. So these two are enough to satisfy our self-employment business. And if these two signs are used well, its leverage rate can still be used more in the legal scope. This is self-employment. The second is about this housing business. The first is to cooperate with real estate companies. Whether we send a real estate sign or cooperate with the real estate companies in the market, rely on this real estate sign to open. The second is that in the current financial environment, For your second part question for our possible business model change, I will address this question in two parts. First, for our self-funded business,

we can further leverage our microfinance license and our guarantee license. Both licenses are national wide and they have enough leverage to be utilized. Second part for our loan facilitation business, first we can actively cooperate with the current existing credit rating agencies. Secondly, the microfinance license can also play a vital role in the loan facilitation business.

Last, KCB has deep-rooted relationship with us.

we can further license to fully comply.

Sorry, Mandy was breaking up a little bit, her line, but basically Hesham said is that KCB, even though it's not our directly holding license, it's a related party hold it, but we can still leverage the relationship with KCB and to use a banking license, conduct a series of business activities there. Thank you. Thank you.

Thank you, Nick. Thank you very much for your answer. If I may, I would like to ask a quick question. You mentioned that in the future, Xiao Dai may take on a certain role. We know that the management of Xiao Dai is still looking for a draft. Is it expected that this area will fall soon? Is it one of the requirements in the 13th and 14th revisions? So a quick follow-up from me. So you mentioned that the microloan license could play a role in the future. So given that the regulation regarding the handout of microloan license is still in the consolidation status, do you have any expectation of when it's going to be rolled out? And also, is such a microloan license part of your sales inspection and ratification progress for the 14 platforms? Thank you.

Um, um, um, um, um, um, um, um, um, um, um,

To answer your question, first, we are not informed about the timeline of the guideline for a microfinance license. We believe that may follow after some basic law about the nine financial institutions guidance is released. Secondly, yes, you are right. The guideline of microfinance license is within the issues. of the 14 Internet Platforms' Recognification Progress.

That's all from me.

Thank you. The next question is Thomas Cheung from Jefferies.

Good morning. Thank you, Manager Cheung, for accepting my question. My question is mainly to ask about the opening of an exhibition in 2022. Thanks, management, for taking my questions. My question is more about the 2022 outlook. Though it is a bit early to talk about next year numbers, but given the fact that the macro headwinds and the uncertainties uncertainties of the properties. How should we think about our business growth momentum into next year? Qualitatively would be great. Thank you.

We can only say that we are now using a cautious attitude to look forward to next year. The specific guidance for next year, we may not be able to give it out immediately in the calculation. But it is true that we are also cautious. This is the first. The second is that in the past, our own business and our own risks have gone through a very, very cruel cycle. Yes, sure.

First, understand that market has some concern about macroeconomy next year. We stay very vigilant and closely monitor our operational metrics on every front. Nowadays, we are still in the budgeting process. We do not have more concrete guidance to share with you, but we can assure you that all the outlook color we give now is based on very prudent approach. Secondly, I want to emphasize that our business and team has experienced a cycle of regulation and pandemic last year. This is a very strong demonstration of the resilience of our business and the team. We don't think next year the situation will be more severe than the previous regulator cycle or pandemic cycle. Therefore, we are very confident.

Thank you very much. I can ask a follow-up question. I mainly want to ask about different industries in our small and medium-sized enterprises. Recently, in our main industry, what is the situation of customers? What is their business operation? Have we seen that they are affected by this macro? Thank you. My follow-up question is about our different customer or borrower industry categories. Given that we are ramping up the SME business, I just want to get some color about the industries that they are engaging in and whether they are impacted by the macro headwinds Is there any categories that are doing okay, some are not doing better or a bit below expectation? Can we talk about the key sectors that they're engaging in and their outlook? Thank you. 好,我們團隊在展業的過程中間也確實通過數據和通過實地

Go ahead, Mandy. Sure.

Go ahead. Okay, I will translate first. Currently, SME takes a small portion in our business, and our customers are tiny small business customers. Based on our first-hand information with them, we still see very good risk performance. Zhengdong, please go ahead.

Okay, yes. As I said, our current SMEs are relatively small in the entire market. This means that we have a lot of space to choose from. Some of our customers are full-time customers. We are doing some survey with them. and some actual risk performance, the response is relatively stable. But in a small number of cities, especially in the cities where the epidemic has occurred, there has been a certain degree of fluctuation. But we believe that the epidemic will still be relatively well controlled in the future. In terms of new customers, we are also constantly improving our customer quality. As mentioned before, the proportion of our leading teams is constantly increasing. The current risk of leading teams is between 80% and 90% of the overall channel. As this area continues to increase, the risk of small enterprises will also be better controlled.

So as Haixing has mentioned that as our volume for SME business is relatively small, we have a larger space to choose the customers we want. And for keep study and risk performance like to say that the risk is relatively steady. But for some cities that with the COVID problem, there's a small fluctuations. While with the COVID it's more about internal control, the risk performance will become steady again. And as mentioned before, for customers acquired, the portion of direct sales is increasing, and the risk performance of the direct sales customer acquisition is just like 80% to 90% of the average. So with the increasing of these channels, we can see our risk performance will be lower in the future.

I just want to add a comment. Thomas, I just want to add one color to your first question regarding the outlook for 2022. As Hanshung mentioned, yes, at this point, we can't give you any official sort of guidance to the outlook. But if you recall, after the second quarter, we did the stress test, which related to the 24% rate cap. In that stress test, we consider the microenvironment for 2022, as well as the regulatory change, in particular related to the credit agency connectivity issues, which we believe is a very complicated issue involving a lot of technology problem solving. And with that kind of assumption, in that stress test, if you recall, we assumed a 20% kind of volume growth for next year. And then the net take rate, as I mentioned earlier in this call, will come down from 4% right now to about 3% in that stress test. So that assumption, as well as the conclusion for that stress test, still hold at this point. Although I just want to emphasize again, this is not an official guidance. Thank you.

Got it. Thank you.

And thank you. This is the end of the question and answer sessions. Now I hand back over to management for closing remarks.

Okay. Thank you, everyone, for joining us for the call. If you have additional questions, please contact us directly. Thank you. Bye-bye.

That's the end of the conference call. You can hang up. Thank you.