Qifu Technology, Inc

I will quickly translate my question. So my question, thanks for management teams to giving this opportunity. So my question is about the management strategy for capital light and capital heavy assets. Can you help us break down the current profit margins of capital light and capital heavy loans? And how does the management view the proportion of capital light and capital heavy loans in the future? So compared with the goals of loan volume, will companies be more focused on the profitability in 2024? Thank you.

Thank you, Sandy.

Regarding new assets, from the perspective of take rate, the profitability of these two assets, we should say that we have worked hard to make these two assets It is basically balanced at a take rate of 3%. The heavy assets are slightly higher than 3%. We will also use our detailed operation and configuration of the green assets to make it close to 3%. So they are not that different in nature. Regarding the future, from the point of view of asset ratio, we should say It's not about the absolute proportion as our main goal. We should say that we are balancing our profitability and the long-term health of our entire asset pack as our ultimate goal. We maintain a relatively dynamic balance state. This is their proportion. From the future, these two... from the point of view of liquidity and cash flow, we have the same logic. We don't consider cash flow as our only priority, and we don't consider liquidity as our only priority. Because if we consider liquidity first, we can actually, like some platforms, um um um Okay.

Thanks, Cindy. Regarding the probability of our capital heavy and capital light business model, I would say both capital heavy and capital light loan facilitation model generates a roughly 3% net take rate. With capital heavy a little bit higher than 3%, and capitalized a little bit lower, but pretty close to 3%. In terms of the loan mix, we will balance profitability and the long-term healthiness of our loan portfolio and keep a dynamic balance between these two categories. Regarding the importance of loan volume versus profitability, I would say it is not our priority to either pursue loan growth or pursue profitability improvements. If we only pursue profitability, we can just all do as a heavy business, like some other platforms. But our target is to balance profitability and the long-term healthiness and sustainability of our loan portfolio. So we expect LoanMix will maintain largely stable in the foreseeable future. Thank you.

Yeah, I probably want to add one little point here is that this year in 2023, because the microfactors and also because the first half of the year, we are facing a tough comp in terms of pricing versus last year. That's why you see the profitability growth is slower than the long volume growth for 2023. And I would say these kind of negative factors related to probability is already behind us. So in the future years, we will try to at least maintain the same pace in terms of between the volume and the probability. If anything, we try to also drive some additional operating leverages in the future. Thank you, Cindy.

The question.

Our next question comes from the line of Yada Li from CICC. Please go ahead.

Hello, Manager. Thank you very much for giving me the opportunity to ask this question.

I am Li Yada from CICC. Today, I have a question for you. I would like to ask you about the trend change in the future of T-Crate. Then I'll do my translation. Hello, management. Thanks for taking my question. This is Yada.

Okay, because we understand your question, so we can go ahead and answer this question.

Okay. 谢谢亚达,我回答一下。 关于Tegra的变化趋势, 我们认为短期上看的话, 影响Tegra因素比较多, 也会时常会有一些波动。 比如说我们今年来看, The risk will fluctuate. The capital cost will fluctuate. Therefore, in the midst of all kinds of fluctuations, through our own efforts, for example, through the reduction and optimization of capital cost, and by investing more research and development resources, we can reduce the cost of our business. For example, in terms of customers, risks, and so on. Based on our various technology-driven management, we try to eliminate the impact of this up and down fluctuation to maintain a relatively stable take rate. From the perspective of the third quarter, our third quarter, through our various sophisticated research and development, Our costs have been reduced and our efficiency has been improved. We are also providing more diversified services to our users in order to improve our overall profitability. In fact, our take rate has risen in the third quarter. But we also saw that the size of our goods in the third quarter has actually risen. The wind and wind of our third quarter From the tax point of view, it has also reduced some of the profits. Therefore, it seems that the response to the results is similar to that of the last quarter. But in fact, our Q3 is actually a process of an increase in the take away. From a long-term perspective, for us to continue to invest more of our technical power to improve our overall operating efficiency, we

Okay, regarding the take rate, I would say in the short run, we will see some fluctuation in terms of our credit cost and funding cost. In this regard, we will further fine-tune our operation, optimize our funding structure, and invest more resources into R&D to improve our operational efficiency and funding cost. With those costs and efficiency improved, we will mitigate largely the fluctuation. So we will see the take rate maintain stable in short term. Actually, if you look at our take rate in Q3, it's actually improved sequentially from Apple to Apple perspective with diversified services offered to our users and optimizing our asset allocation. Because we expanded our customer outreach in Q3 and adding on additional tax costs related to our dividend and the share buyback program, it looks like our take rate in Q3 maintains stable from last quarter. From long-term perspective, we will further improve our operational efficiency and we do hope to see a steady increase in our take rates. Thank you.

Thank you. I see no more questions from the phone line. I would like to hand the call back to management for closing remarks.

Okay. Thanks again for everyone to join us for the call. If you have additional questions, please feel free to contact us offline. Thank you. Have a good day.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect your lines. you Ladies and gentlemen, thank you for standing by and welcome to the Chifu Technology third quarter 2023 news conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session, at which time, if you wish to ask questions, please press star 11 and wait for your name to be announced. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Karen Chee, Senior Director of Capital Markets. Please go ahead, Karen.

Thank you, Desmond. Hello, everyone, and welcome to Qifu Technologies' Third Quarter 2023 Earnings Conference Call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Wu Haisheng, our CEO, Mr. Alex Xu, our CFO, and Mr. Zheng Yan, our CIO. Before we start, I would like to refer you to our Safe Harbor Statement in the earnings press release. which applies to this call, as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP financial measures to GAAP financial measures. Also, please note that unless otherwise stated, all figures mentioned in this call are in R&B terms. Before we start, please also note that today's prepared remarks from our CEO will be delivered in English using an AI-generated voice. Now, I will turn the call over to Mr. Wu Haisheng. Please go ahead.

Hello, everyone.

Thank you for joining our third quarter earnings conference call. Since the start of the year, the momentum of China's macroeconomic recovery has softened after rebounding earlier in the year with effective demand for consumer credit also coming in weaker than expected. We promptly adjusted our strategic approach to this new market environment by diversifying our customer acquisition channels and refining operations. all with the clear goal of driving high-quality growth and improving profitability. These efforts yielded solid results in Q3. By the end of the quarter, our platform empowered a total of 155 financial institutions and cumulatively served more than 49 million users with approved credit lines. Total loan facilitation and origination volume on our platform reached RMB 123.1 billion, up roughly 11% year-over-year. With the quality of our earnings further improving, our non-gap net income for the quarter increased by approximately 14% year over year. In today's complex macro environment, it is particularly important that we expand our safety cushion by improving profitability. To achieve this, we are optimizing resource allocation across customer acquisition, products, risk management, and asset distribution to boost operational efficiency and ultimately drive bottom line growth. Now I'll walk you through some of the progress we made in this regard during the quarter. To start with, we continue to explore diversified customer acquisition channels and deploy innovative approaches to attract new customers, which not only improved customer acquisition efficiency, but also resulted in notably better quality of new users. In terms of optimizing our customer acquisition channels, we established a partnership with a leading short-form video platform through our embedded finance business in the third quarter. Leveraging the platform's massive active user base and our ability to accurately profile users and identify risk, we have consistently maintained a leading market share on the platform since the start. During the quarter, our embedded finance business generated an impressive 46% sequential increase in the number of new users with approved credit lines. Approximately 33% of total new users with approved credit lines during the quarter were acquired through the embedded finance channel. We also intensified our marketing efforts through innovative marketing approaches during the quarter to attract high-quality customers. This was done by deploying more compelling ad placements to expand our customer reach. Based on user profile analysis, users acquired through innovative marketing methods significantly outperformed those obtained through conventional methods in terms of educational background, mortgage and credit history. They also clearly have better risk performance in terms of short-term delinquency rates, as we observed during the first three months. With our innovative customer acquisition strategy firmly in place, the proportion of high-quality users increased by more than four percentage points from July to October, This not only directly complements our existing user base, but also contributes to the stability of our overall risk performance. As a result of these initiatives, the number of new users with approved credit lines increased by 18% in Q3 sequentially, while unit customer acquisition costs increased only slightly. Moving on to product design, we introduced a loyalty program to enhance engagement of existing users. By offering a wider range of value-added services, we are effectively enhancing user engagement and retention, which increases our revenue and profit per user. Users who joined the loyalty program demonstrated higher engagement with a double digit increase in both the rate of drawdown and the number of loans borrowed over a certain period of time. Turning to risk, we swiftly responded to the changing market environment. In Q3, we gradually tightened credit standards and upgraded risk models. In particular, we further enhanced the knowledge graph for our broadly defined SME segment. By closely analyzing relationships among individuals, businesses, and industries, we improved our ability to identify risks within this segment. It's worth noting that there are clear differences between our broadly defined SME segment and SMEs in the traditional sense. Ours are primarily younger enterprises acquired through online channels. When conducting risk assessments, we place more emphasis on individual credit history and use business data as a secondary reference. As a result, credit lines extended to our SME segment are usually smaller, making associated risk much more manageable. Compared to the consumer segment, the SME segment generates much more stable demand and stronger growth potential with similar risk performances. Looking ahead, we are confident that there is significant room for growth and value generation over the long term for our broadly defined SME segment, driven by our accurate user identification and differentiated operations. Lastly, we kept pricing at stable levels and leveraged our funding strengths to further optimize our economic model. With relatively ample liquidity in the financial system during the quarter, we further optimized our funding structure by increasing the proportion from larger banks which reduced our funding costs by another 20 basis points. In terms of ABS, we secured ABS investments from multiple state-owned and joint stock banks and top securities firms, leading to a 47 basis point decrease quarter over quarter in ABS issuance costs. With the accuracy of user profiling and identification continuously improving, we also further expanded the range of our financial institution partners strengthening our ability to serve various loan asset segments. With more financial partners coming on board under the ICE or referral model, which further mitigates risk, our ability to engage with the lower tier user segment has significantly improved. As we continue to optimize asset allocation efficiency, we expect our overall profitability to further improve going forward. Now, let me share with you the progress we made on the technology front. Our technology solutions business is making solid progress as we expand the array of solutions we offer to cover the entire credit process. During the quarter, we entered into partnerships with three additional financial institutions, each from a different category, a joint stock, internet, and private bank. To cater to the diverse needs of our banking partners, we adopted various deployment models and are committed to providing them with end-to-end technology solutions as well. Going forward, we will extend our end-to-end technology solutions to more financial institution partners to scale up our client base. In the long run, we expect a steady increase in the take rate for our technology solutions business. Additionally, we continued to invest in cutting-edge technologies such as artificial intelligence and large language models. On September 18th, we partnered with the China Academy of Information and Communications Technology to officially unveil the first domestic standard for large language models in the financial sector. The standard will serve as a crucial reference and benchmark for the design, development, application and review of large language models in finance. At the same time, we purchased hundreds of graphics cards and have been exploring the application of AIGC technology to improve efficiency throughout the entire credit process by conducting tests or implementing it in advertising, telemarketing, loan collection and quality control. For example, our telemarketing system is now able to conduct semantic analysis and extract valuable leads from each conversation improving our telemarketing conversion rate by more than 5%. In addition, around 70% of our image-based marketing materials are currently generated by AIGC. In the future, we will use large language models to tag and rate these materials from multiple dimensions to optimize ad placements and boost marketing effectiveness. Looking back at the past three quarters, Despite a challenging macro environment, we remained vigilant about market conditions and improved our earnings quality by further optimizing operations and fine-tuning our business model. Since Q3, certain macro indicators are showing marginal improvement as a result of multiple supporting policies. Against this backdrop, we are confident in our ability to continuously make breakthroughs and create value for our shareholders with better results. With that, I will now turn the call over to our CFO, Alex Hsu, who will walk you through our financial results for the quarter.

Okay. Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our third quarter earnings call. Facing slower than expected micro recovery and worsening consumer sentiment, We proactively took actions in Q3 to optimize our product and service offerings, strengthen relationship with users and key partners, aiming to drive long-term sustainable quality growth. In Q3, we saw some volatility in asset quality and key leading risk metrics start to fluctuate from historical best levels achieved in previous quarters. Day one delinquency was 4.6% in Q3 versus 4.2% in Q2. The uptake in day one delinquency mainly reflect borrowers' negative sentiment toward the ongoing micro uncertainties. 30-day collection rate was 86.7% in Q3 versus 87.2% in Q2. This modest decline also was driven by micro weakness. Throughout Q3, we have proactively adjusted our risk management models and gradually applied more restrictive standards on incoming applications. By late September, we start to see stable credit quality among new borrowers. As economic conditions remain challenging, we may continue to see some fluctuation of these metrics in the near future, although overall risk level should still be manageable with our continued effort to proactively mitigate risks. Total net revenue for Q3 was 4.3 billion versus 3.9 billion in Q2 and 4.1 billion a year ago. Revenue from credit driven service, capital heavy, was 3.1 billion in Q3 compared to 2.8 billion in Q2 and 2.9 billion a year ago. The year-on-year growth was mainly due to growth in unbalanced sheet loans partially offset by decline in expected average tenure of the loans. The sequential increase reflected growth in loan balance as well as continued improvement in effective tenors. Unbalanced sheet loans account for over 19% of total loan volume. Overall funding costs further declined by roughly 20 bps with the help of our strong relationship with financial institution partners as well as additional issuance of ABS. Revenue from platform service, Capital Light, was $1.2 billion in Q3 compared to $1.1 billion in Q2 and $1.2 billion a year ago. The sequential growth was mainly due to continued improvement in overall effective tenor of the loans and strong contribution from ICE. substantially offsetting the decline in capital light loan facilitation volume. For Q3, capital light loan facilitation, ICE, and other tax solutions combined account for roughly 56% of the total loan volume, compared to roughly 58% in prior quarter. We expect this ratio to be roughly stable around this level for the year. We will continue to evaluate different components of our operation and seek a better mix between risk-bearing and non-risk-bearing solutions based on microenvironment and operational conditions. In Q3, we saw continued sequential improvement in revenue take rate for both capped heavy and caplied business, as early repayment ratio gradually returned to normal levels and effective tenors gradually extended. During the quarter, average IRR of the loans we originated and or facilitated remained stable Q1Q, well within the regulatory rate cap requirement. Looking forward, we expect pricing to be fluctuating in a narrow band around this level for the coming quarters. Sales and marketing expenses increased 21% Q1Q but declined 15% year-on-year. We added over 1.7 million new credit line users in Q3 compared to 1.5 million in Q2. Unit cost to acquire new credit line user also increased modestly Q on Q to 306 from 296 in Q2. While we will continue to try for efficiency in our operation, we may adjust the pace of our new user acquisition based on micro conditions from time to time. As Haisheng mentioned, we have made noticeable progress in diversifying our user acquisition channels during the quarter. Meanwhile, we will continue to focus on re-energizing existing user base as repeat borrowers historically contribute vast majority of our business. As micro uncertainties persist and the credit quality fluctuates, we will continue to take prudent approach to book provisions against potential credit losses. Total new provision for risk-bearing loans in Q3 were approximately $2.1 billion, and writebacks of previous provisions were approximately $600 million. Provision coverage ratio, which is defined as total outstanding provision divided by total outstanding delinquent loan balance between 90 and 180 days, were 534% in Q3, compared to 511% in Q2. Non-GAAP net profit was $1.18 billion in Q3 compared to $1.15 billion in Q2. Effective tax rate for Q3 was over 22% compared to our typical ETR of approximately 15%. The higher ETR in Q3 was mainly due to additional withholding tax provision related to cash distribution from onshore to offshore for dividend payments and share repurchase programs. Please also note our second quarter earnings was helped by a tax rebate of approximately $160 million. Excluding the tax rebate, non-GAAP net income actually grew approximately 16% sequentially in Q3. With solid operating results and stable contribution from capitalized models, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, was 3.5 times in Q3, near historical low, compared to 3.8 times a year ago. We expect to see the leverage ratio fluctuate around this level in the near future. We generate approximately 1.2 billion cash from operations in Q3 compared to 1.8 billion in Q2. The decline was mainly due to the change in working capital at the end of the quarter. Total cash and cash equivalent was 8.2 billion in Q3 compared to 8.5 billion in Q2. Non-restricted cash was approximately 4.9 billion in Q3 compared to $5.3 billion in Q2. The sequential decline in cash position was mainly due to increased cash usage in our unbalanced sheet lending. As we discussed earlier, we will continue to look for opportunities to deploy resources to launch new initiatives, develop new technologies, and expand services offerings. As we continue to generate healthy cash flow from operations, We believe our current cash position is sufficient to support our business development and to return to our shareholders. In June 20, 2023, we announced a share buyback program to repurchase up to $150 million over a 12-month period. As of November 16, 2023, we have bought approximately $80 million worth of ADS in open market at an average price around 16.2 US dollar. We will continue to execute the buyback program in accordance with related rules and regulations. With the fully execution of the repurchase program and the dividend plan, the combined payout ratio will exceed 50%. Going forward, we will continue to optimize our capital allocation plan and make timely adjustments to generate attractive returns to our shareholders. Finally, regarding our outlook, while micro recovery appears slower than expected, we remain confident to achieve our operational target for the year. As such, we now expect Q4 total loan volume to be between $116 billion and $126 billion. And for the full year, total loan volume to be between RMB $473 billion and RMB $483 billion, representing year-on-year growth of 15% to 17%. 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. We will now begin the question and answer session. To ask a question on the phone, please press star one one and wait for a name to be announced. If you'd like to cancel your request, you can press star one one again. For those who can speak Chinese, please kindly ask your question in Chinese first, followed by English translation. In addition, in order to have enough time to address everyone on the call, please keep it to one question and one follow up. and return to the queue if you have more questions. Thank you. One moment for the first question.

The first question comes from the line of Richard Xu from Morgan Stanley. Please go ahead.

Thank you very much for giving me this first question. I would like to ask two questions. One is, What are the trends in the recent months in terms of modern demand? Wang Licheng has recently mentioned that a large part of the current demand for consumption belongs to the science of Fan Xiaowei. What are the different trends in terms of demand and pure consumption? What are the differences in the strategic control of this area? Secondly, I would like to ask what is the level of the latest capital costs? essentially have two questions. One is, what's the credit demand trend at the moment? Particularly, there's some demand for the consumption from the SME client base. What are the differences between the trends from the typical consumption loan demand? And also, any differences in strategy and risk management? Secondly, what's the funding cost and whether there's further room to reduce funding costs in the future? Thanks.

Okay. Thank you, Richard.

First of all, I'd like to make a statement. In the previous part of the presentation, I was asked by our large model team to help me with the improvement of artificial intelligence training. I still need to use Chinese for the Q&A part, so I'll make a report for you. Then I'll talk about these two questions. About the demand now, we have seen from Q4 recently, compared to Q3, we should say that there is a steady decline. There should be some periodic factors, because every year in October, because there is a golden week, so it is relatively less than the previous one. Well, that's that. By November, it will be relatively more stable. This is the overall trend. Well, from the point of view of Fang Xiaowei, what we see is that Fang Xiaowei's demand should be slightly better than the consumer demand. At the same time, different industries also show some structural differences. For example, the sports industry, the entertainment industry, or the service industry, the service industry and the technical industry, its demand is obviously better than that of other industries. So it has a structural feature compared to the consumer. In comparison, compared to the consumer, The demand for Fan Xiaowei's customer group is also more stable. Its demand is relatively large, so its value is also higher than that of the consumer group. Therefore, we also hope to improve the recognition ability of Fan Xiaowei's customer group in our overall customer group. Because these customer groups have different needs, so they need to use some differentiated products and services to satisfy them. You can only improve its overall connection to our platform by satisfying it. Therefore, we really hope to increase the service design of this customer identification and differentiation. What we also need to emphasize is that our Fan Xiaowei customer is still different from the traditional Xiaowei in terms of meaning. Because our amount will be much smaller than them, than the traditional Xiaowei. Our risk modeling is also based on personal image modeling. The business data is just a support. On the risk result, Fan Xiaowei's risk will also be much better.

Okay, thank you, Richard. I want to highlight that the prepared remarks just now delivered was generated by our large language model team. But for Q&A part, I will still answer the question in Chinese. Regarding our question, stepping into Q4, we have observed the credit amount slightly trending down. In particular, credit amount was soft in October, mainly due to the seasonality factor during the national holiday. And after that, it maintains stable into November. From user segment perspective, the credit amount from broadly defined SME segments is slightly better than our consumer sector. And we do see some divergence from industry perspective. For example, the service sector like sports, entertainment, and also the technology sector are better than the others. Compared to consumer segments, the broadly defined SME segment has more stable credit amounts and generates higher value. We expect to enhance our ability to identify the user group and use diversified products and services to improve our customers' experience and their as well. Here, we would like to emphasize our broadly defined SME users are totally different from traditional SMEs, as their ticket size is much smaller, and our risk model are more based on individual profiles with the business data as supplementary information. And therefore, the risk performance of our broadly defined SME users are much better.

然后这个客群的这个风险管理措施, 看看我们CRO政业有没有补充的。

And I would like to invite our CIO, Mr. Jun Yan, to add on the risk part.

Okay. As Mr. Hai said, our risk management for Fan Xiaowei customers is different from the risk management model that is commonly based on corporate management. We are based on corporate personal information and corporate business information. In the case of user authorization, we have introduced 11 special data sources, such as tax, issuance, public information, water supply, balance sheet, and other data. This combines the performance of the enterprise group on the platform. We will integrate these tax data into a algorithm, so that the small and medium enterprises can carry out more accurate risk assessment. As Haisheng just mentioned,

Our risk management mechanism for the broadly defined SME segment is different from the traditional SME sector in the sense that our risk model is primarily based on personal data of the business owner with the enterprise data as the secondary layer of information input. Upon user's approval, we integrate the personal credit data with the SME specific data source. For example, the tax, invoice, cash flow, billing, et cetera, based on our sophisticated algorithm so we can better evaluate the creditworthiness of the SME borrowers. As this segment normally has urgent and higher credit amounts, so we combine the fixed credit line with additional temporary credit lines in relation to certain seasonal events like Double Eleven Shopping Festival on June 16, et cetera, so we can better serve all kinds of needs of the SME users. Okay.

And then regarding the funding cost issue, we should say that there is a continuous decrease in the third quarter compared to the second quarter. There is a 20 BP decrease. Our ABS production cost has also decreased by 47BP. In recent times, it has basically maintained a relatively stable state with Q3. In terms of the background of JANXI, JANXI logically can drive the cost of financial institutions to have a drop. and pass it on to the physical economy. But this year's environment is still quite complicated. The mentality we see is still not clear enough. Our capital costs continue to decrease this year. We think it is mainly determined by supply and demand relations. This year, from the financial institutions' point of view, after the fall of the entire mortgage, The demand for capital for consumer assets is clearly rising. And the scarcity of our assets is also very good. Therefore, we have driven a significant decline in funding costs throughout the year. Since September this year, we have seen that the demand for government financing and the real estate industry will also lead to There are some of these from consumption. Now this asset is a kind of power that is divided externally. Well, that's what we're going to do for a long time. Well, make sure you're ready to see if they're going to affect us. This is the cost of this continuous decline. Well, from the point of view of this ABS, we should say that we will still be able to maintain or even expand the pace of our ABS. Regarding the funding cost, our cost of funding declined by 20%.

BIPs sequentially in Q3, with our ABS issuance cost down by 47 BIPs. And our current funding cost is quite similar to the Q3 level. From a rate-cutting perspective, theoretically, rate-cutting can drive down the funding cost of financial institutions and eventually benefit the real economy. However, due to the complex macro environment in this year, we didn't see it help that much. Our funding cost decline this year was mainly driven by the supply and demand dynamics in the market, as the funding partners allocated more resources to consumer loan assets when the mortgage loan is underperforming this year. Given the scarcity of our assets, we managed to continue to optimize our funding costs in this year. However, since September, there is some other sectors, including government financing, property sectors, are also attracting funding flows, which may put pressure on the further reduction of our funding costs. Going forward, we will continue to optimize our funding structure, and keep the pace or even expand our ABS issuance to maintain our competitive advantage from the funding part and maintain our funding cost at a stable level.

Thank you for the questions.

I'll now move on to the next questions from Alex Yeh from UBS. Please go ahead.

Thank you for the opportunity to ask a question. I have two questions. The first one is about asset quality. Can you give us more information about Q3 asset quality? There are some fluctuations. In fact, I feel that it is more of an impact on the macro environment, or is it that our industry itself is facing some challenges, such as recovery efficiency? Is there any decline? What is the trend of Q4 in the last two months? The second question is about the price trend. We also saw a theme this year. The government has reduced the interest burden of ordinary families, so it has also reduced the interest rate of existing housing. My first question is about the asset quality outlook. Can you give us more color in terms of the reason for causing the fluctuations in Q3? Is it more driven by the macro environment or some of the industry specific reasons such as your collection efficiency? And what's the latest trend in Q4 in the most recent months? And the second question is on the loan pricing outlook. So in September, we have seen China lowering the mortgage rate for the existing mortgages. So under that kind of a backdrop, do you expect the current lower interest rate environment to also translate into some of the low downward pressure to our low pricing future?

Thank you.

Regarding the Q3 capital fluctuations, we think it is mainly due to two factors. One is the macro level. We also know that some major macro economic indicators are not as expected. The second is that the new generation investment itself actually has certain seasonal characteristics. Generally speaking, the first half of the year is relatively plentiful, and the second half of the year will be relatively tight. Q3 and Q4, there will be a certain degree of fluctuation. These two factors will ultimately be reflected in the decline in the recovery rate. The entire industry may encounter such a problem. We expect the overall market to be more flexible in the next three hundred years. This will be helpful for the risk of Q4 added assets. At the same time, we have made rapid adjustments since Q3. including some of the quality structures to optimize the market and the industry, as well as some strategies to reduce the cost of transactions and reduce the cost of customers. So, from the early risk performance of new assets, for example, the FPC-7 index, we saw that in August, there was a relative decrease of 5%. And then in October, there were some performance. It is expected that the full-month index will be further optimized in September. In terms of Q4, we will further strengthen the construction work of the risk tool upgrade. It will probably include three aspects. We will introduce three major Internet companies, and then we will bring in the big model team from China and the venture team to go to the big companies for some joint modeling. The second part is that our internal data will continue to be excavated, and we will take a version of our regular B card. will focus on a new round of excavation for the app purchase data and the real-estate data of the bank, and use our series of algorithms to build a large model to mark the risk. This is expected to be completed by the end of November, and the integrated modeling of the regular B-card will further improve the risk identification capability. The third one is an argument to upgrade the risk model in the middle, which will build a fast-reacting B-card level. This rapid response B card is different from the regular B card with long-term sample stability requirements. This rapid B card will be based on more recent samples, and then integrate the latest data and algorithmic results to quickly update the B card score to quickly identify new risks. This work is expected to be completed in December. Okay, I will do the translation. The fluctuation of our asset quality in Q3 was mainly a result of two factors adding together. The first is from a macro perspective, the key macro indicators are below the

The second reason is that the of the credit industry in the sense that the liquidity is typically better in the first half than second half, which led to some fluctuation of our asset quality in Q3. However, we expect the situation, especially the liquidity situation, will improve in early next year, which may help improve the risk performance of our new loans issued in Q4. At the same time, we swiftly adjusted our operations by upgrading our user base, tightening our credit assessment criteria, and reducing the exposure of our existing borrowers since Q3. Accordingly, our early risk indicators for new loans, say FPD7, improved by 5% sequentially in September, and we expected to continue to improve in October. And in Q4, we have further strengthened our risk management tools from three aspects. First, we incorporated the scorecard data from three leading internet platforms and built joint model with those platforms. Second, we deep dive into our internal data and upgrade our regular B scorecard by further leveraging our app data and PBOC data. using sequence algorithm and large language models to construct risk sub-analysis, aiming for an integrated B-Scorecard and further improved screening capability by the end of November. Third, we will upgrade our post-landing risk models and generate fast-responding B-Scorecard rating system by end of December, primarily based on recent samples which is more helpful for us to identify new risks. Putting together all these efforts, we expect the risk performance of the new loans originated in November and December will stabilize. 关于定价这个问题,我想说,应该说是从主观上呢,我们会采取不同的这个动作来吸引不同的客群。

For example, we will take better and lower-priced tests for better and better customer groups, in order to improve the satisfaction of our users and optimize the structure of our customer groups. At the same time, we will also carry out moderate pricing possibilities for users with higher risks. Therefore, comprehensively speaking, we will still be able to maintain stability in the average price. But at the same time, in addition, from the background of Hongguan, consumer finance is still one of the main means of stimulating our consumption. Under the current supervision system, the country has already formed a multi-level consumer finance supply system. Regarding pricing, I would say from our own intention perspective, we will conduct different pricing tests for varied customer groups.

to improve user stickiness and satisfaction. Through more attractive pricing, we are also able to acquire quality new users to improve our user mix. Meanwhile, we will also raise our pricing for higher risk users. Combined, our average pricing will continue to keep stable. In the current macro environment, consumer finance is also one of the means to boost consumption and economy. Under the current regulatory system, this is a multi-layer supply system for the consumer credit industry. Based on that, we will also set price based on supply and demand dynamics and actively play our role to drive the consumption and help SME players.

Thank you, Alex.

Thank you, Alex.

For the questions. One moment for the next question. Next question comes from the line of Emma Xu of Bank of America Securities. Please go ahead.

谢谢给我这个提问的机会。 那我这边是有一个问题是关于这个股东回报的。 我们看到就是说公司还在持续的回购, 截至到最新其实已经回购了80 million, 就是8000万美元这样的一个回购, So my question is about your shareholder capital return. It's really hard to see that you continue to buy back your shares. at current level. And I just want to ask whether you will continue to do the buyback and after the completion of the current buyback program, will you launch more buyback program in the future?

Okay, Emma, I will take this question. So as you said, we already did 80 million repurchase since June 20th. well ahead of the timeline and obviously we'll continue to execute the current repurchase program throughout the remainder of the year and also into next year. We already structured internally a very comprehensive system to periodically review our cash position as well as the deficit usage of the cash, try to compare the expected return between the reinvestment in operations and the return generated from either the buyback or the dividend payment. Through this kind of a review, we will determine which is the best way to deploy additional cash or additional resource in the future. After we complete the current buyback program as well as this year's dividend plan, we will do a new review based on the cash position at that point. and make necessary changes to the shareholder return program, either through buyback or through a dividend or through some kind of a combination of the both. In summary, basically the logic behind our future cash deployment is based on whichever method can generate the highest shareholder return then we will use the cash to that direction. Thank you.

Thank you.

Thank you for the questions. One moment for the next question. Next question, we have the line from Cindy Wang from China Renaissance. Please go ahead.

Thank you for the opportunity to ask me this question. I have a question about the strategy of the management team for real estate. Can you tell us about the current profit of real estate and how the management team sees the future of real estate? Compared to the growth of the amount of money spent, will we value profit more in the future? I will quickly translate my question. So my question, thanks for management teams to giving this opportunity. So my question is about the management strategy for capital light and capital heavy assets. Can you help us break down the current profit margins of capital light and capital heavy loans? And how does the management view the proportion of capital light and capital heavy loans in the future? So compared with the goals of loan volume, will companies be more focused on the profitability in 2024? Thank you.

Thank you, Sandy.

Regarding new assets, from the perspective of take rate, the profitability of these two assets, we should say that we have worked hard to make these two assets It is basically balanced at a take rate of 3%. The heavy assets are slightly higher than 3%. We will also use our detailed operation and configuration of the green assets to make it close to 3%. So they are not that different in nature. Regarding the future, from the point of view of asset ratio, we should say It's not about the absolute proportion as our main goal. We should say that we are balancing our profitability and the long-term health of our entire asset pack as our ultimate goal. We maintain a relatively dynamic balance state. This is their proportion. From the future, these two As for the importance of the amount of money and profitability, we have the same logic. We don't consider the amount of money as our only priority, and we don't consider the profitability as our only priority. Because if we consider the profitability as the first priority, then we can actually, like some platforms, um um um um

Okay. Thanks, Cindy. Regarding the probability of our capital heavy and capital light business model, I would say both capital heavy and capital light loan facilitation model generates a roughly 3% net take rate. With capital heavy a little bit higher than 3%, and capital light a little bit lower, but pretty close to 3%. In terms of the loan mix, we will balance profitability and the long-term healthiness of our loan portfolio and keep a dynamic balance between these two categories. Regarding the importance of loan volume versus profitability, I would say it is not our priority to either pursue loan growth or pursue profitability improvements. If we only pursue profitability, we can just all do as a heavy business, like some other platforms. But our target is to balance profitability and the long-term healthiness and sustainability of our loan portfolio. So we expect LoanMix will maintain largely stable in the foreseeable future. Thank you.

Yeah, I probably want to add one little point here is that this year in 2023, because the microfactors and also because the first half of the year, we are facing a tough comp in terms of pricing versus last year. That's why you see the profitability growth is slower than the long volume growth for 2023. And I would say these kind of negative factors related to probability is already behind us. So in the future years, we will try to at least maintain the same pace in terms of between the volume and the probability. If anything, we try to also drive some additional operating leverages in the future. Thank you, Cindy.

The question.

Our next question comes from the line of Yada Li from CICC. Please go ahead.

Hello, Manager. Thank you very much for giving me the opportunity to ask this question.

I am Li Yada from CICC. Today, I have a question for you. I would like to ask you a further question. It is mainly about the trend change of T-Crate in the future. Then I'll do my translation. Hello, management. Thanks for taking my question. This is Yada.

Okay, because we understand your question, so we can go ahead and answer this question.

Okay. 谢谢亚达,我回答一下。 关于Tegra的变化趋势, 我们认为短期上看的话, 影响Tegra因素比较多, 也会时常会有一些波动。 比如说我们今年来看, The risk will fluctuate. The capital cost will fluctuate. Therefore, in the midst of all kinds of fluctuations, through our own efforts, for example, through the reduction and optimization of capital cost, and by investing more research and development resources, we can reduce the cost of our business. such as goods, risks, and so on. Based on our various technical-driven management, we try to eliminate the impact of these ups and downs to maintain a relatively stable take rate. From the perspective of the third quarter, our third quarter, through our various sophisticated research and development, Our costs have been reduced and our efficiency has been improved. We are also providing more diversified services to our users in order to improve our overall profitability. In fact, our take rate has risen in the third quarter, but we have also seen that the size of our goods in the third quarter has actually risen. The wind and wind that we made in the third quarter From the tax point of view, it has also reduced some of the profits. Therefore, it seems that the response to the results is similar to that of the last quarter. But in fact, our Q3 is actually a process of an increase in the take away. From a long-term perspective, for us to continue to invest more of our technical power to improve our overall operating efficiency, we OK.

Regarding the take rate, I would say in the short run, we will see some fluctuation in terms of our credit cost and funding cost. In this regard, we will further fine-tune our operation, optimize our funding structure, and invest more resources into R&D to improve our operational efficiency and funding cost. With those costs and efficiency improved, we will mitigate largely the fluctuation. So we will see the take rate maintain stable in short term. Actually, if you look at our take rate in Q3, it's actually improved sequentially from Apple to Apple perspective with diversified services offered to our users and optimizing our asset allocation. Because we expanded our customer outreach in Q3 and adding on additional tax costs related to our dividend and the share buyback program, it looks like our take rate in Q3 maintains stable from last quarter. From long-term perspective, we will further improve our operational efficiency, and we do hope to see a steady increase in our take rates. Thank you.

Thank you. I see no more questions from the phone line. I would like to hand the call back to management for closing remarks.

Okay. Thanks again for everyone to join us for the call. If you have additional questions, please feel free to contact us offline. Thank you. Have a good day.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect your lines.