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Lufax Holding Ltd American Depositary Shares, each representing two (2) Ordinary Shares
Q3 2020 Earnings Conference Call
12/2/2020
spk00: Ladies and gentlemen, thank you for standing by and welcome to the Luffix Holding Limited third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a Q&A session. Please note, this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Mr. Yu Chen, the company's head of board office and capital markets. Please go ahead, sir.
spk04: Thank you, operator. Hello, everyone, and welcome to our first earnings conference call at the company. Our third quarter 2020 financial and operating results were released by our newswire services earlier today and are currently available online. Today, we have Mr. Qi Guangcheng, co-chairman and director of the executive committee, Mr. Grace Gibb, CEO, Mr. Weiss Choi, CEO of our ICF business, Mr. James Cheung, the CFO, and Mr. David Choi, the CFO of our ICF business on the call. You will first hear from Greg, who will start a call with a review of our progress and details of our development in the quota. Afterwards, our CFO, James, will provide a closer look into our financials before we open up the call for questions. In addition, the additional management team, the entire management team will be available during the questions and answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings price release, which also applies to this call as we'll be making forward-looking statements. Please also note that we will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standard in our earnings release and filings with the SEC. With that, I'm now pleased to turn over the call to Greg, CEO of Lupex. Thank you and welcome everyone to our first earnings call as a public company. Before I begin, please note that all numbers are in RMV terms and all comparisons are about a year-on-year or year-over-year basis unless otherwise stated. We delivered solid results for the third quarter of 2020 with our balance of loans facilitated growing by 21.4% year-over-year to $535.8 billion. Also, the leading indicators for risk performance on our lending portfolio or our lending platform returned to their pre-COVID-19 levels. As planned, we also continue to make progress in establishing a more sustainable risk-sharing business model with our funding partners during the quarter. On the wealth management front, our client assets grew by 7.8% year-over-year to $303.3 billion. amongst which the current product portion grew by 61.6% year-over-year to $346 billion. From a broader perspective, we continue to observe market concerns across the regulatory landscape for fintech companies in China, as well as the tightening of regulatory controls. As such, we remain vigilant and are ready to comply with any new regulatory requirements. I'm sure there will be more questions on regulation, which we'll be happy to address today in the Q&A session. On the back of China's economic recovery and adjustments to our product pricing, we maintained growth in our retail credit facilitation business during the third quarter. Our outstanding balance of loans facilitated grew by 21.4% in the quarter, accompanied by a 16.7% increase in cumulative borrowers. During the third quarter, 74.1% of new loans facilitated were dispersed to our core segment of small business owners. up from 61.3% in the same period of 2019. We also continued to invest in technology as we rolled out on a wider scale our AI and video loan products, thus enabling our customers to complete their loan applications by simply talking to a robotic agent over the Internet without inputting any text. We also develop technology in other areas, including customer profiling, client sourcing, loan underwriting, and payment collection. As a result, our customer experience and operating efficiency continue to improve as evidenced by our solid operating results in the quarter. Starting on September 4th of this year, and in line with our interpretation of the court guidelines for loan primary pricing announced in August, we adjusted our annual percentage rates, or APRs, to ensure that all in costs for new borrowers remained below 24%. After such adjustment, our new loans totaled $54.8 billion in September, representing an increase of 20.1% year over year. underpinning our September growth with an ongoing shift of our business focus to higher quality borrowers who tend to organically produce larger ticket sizes in general. Meanwhile, our revenue take rate declined from 10.4% a year ago to 9.4% for this quarter, reflecting the reduction of APRs. One of our recent focuses has been to restore our loan portfolio quality to its pre-pandemic level by leveraging our strong risk management capabilities. The leading indicator for our loan quality is our monthly flow rate from current loans to those one to 89 days past due or DPD. In September, for example, this leading indicator was 0.5% for general unsecured loans and 0.1% for secured loans, which was in line with our pre-pandemic levels. To give you some context, this same indicator was 1% for general unsecured loans and 0.7% for secured loans during the peak COVID-19 the peak of COVID-19 in February of this year. In addition, the delinquency rate for general unsecured loans that were more than 30 days past due had improved to 2.5% as of September 30th from 3.3% as of June 30th, 2020, while the same metrics for secured loans that were more than 30 days past due had improved to 0.9% from 1.4% at comparable times. Importantly, we also saw a similar level of sequential improvement for our loans that were more than 90 days past due. Meanwhile, as planned, we continue to make progress in establishing a more balanced good-sharing business model with our funding partners in the period. As of September 30th, our outstanding balance of loans facilitated with guarantees by third-party insurance partners decreased significantly. to 91.4% from 95.3% a year ago. Moreover, the share of loans directly guaranteed by ourselves increased to 4.5% as of September 30th from 2.5% a year ago. Looking ahead, we plan to make this initiative and continue to take on more risk on the platform as a key business focus for the remainder of 2020 and beyond. Now, turning to our wealth management platform. During the quarter, our ongoing transformation in this business segment remained on track as our total number of active investors grew by 8.3% year-over-year to $13 million. Meanwhile, our total client assets grew by 7.8% year-over-year to $378.3 billion, amongst which the current product portion, excluding legacy products, increased by 61.6% year-over-year to $346 billion. As of September 30, 2020, legacy products made up just 8.5% of total client assets versus 39% a year prior. During the third quarter, our wealth management take rate for current products increased by 6.4 basis points year-over-year to 36.6 basis points. However, with including legacy products, the total take rate for our wealth management platform decreased to 56%. basis points from 88 basis points in the same period of 2019. One of our management team's core focuses remains on the improvement of our product mix, which underpins the quality of these take rates. As we continue to improve our customer analysis and insight capability during the quarter, we were also able to not only improve our product and service offerings, but also tailor them to each individual investor's preferences. As a result, our 12-month investor retention rate remained high at 95.2% as compared with 91.6% in the same period in 2019. In addition, the contribution of our total client assets from customers with investments of more than $300,000 on our platform increased to 77.5% as of the quarter end from 73.1% a year ago, which once again validated our chosen second focus, for the wealth management business. In summary, during the third quarter, we continued to transition our business model while proactively adjusting our product prices in sync with market requirements. By leveraging our strengths in data analysis and risk management, we've continued to optimize our funding mix, reduce our funding costs, and improve our credit quality. Looking ahead, we expect to deliver solid results for the full year of 2020. with total income to be in the range of RMB 51 to 51.5 billion, and net profit, excluding the non-recurring charges for the CROUND convertible node restructuring, to be in the range of 13.2 to 13.4 billion RMB. Although the recent changes in the regulatory environment have not directly affected our operations to date, we remain extremely vigilant. Should either new or more sweeping regulatory requirements be introduced, be prepared to quickly make necessary changes and ensure our businesses grow in a compliant, sustainable, and profitable manner for the long term. I will now turn the call over to James Dunn, our CFO, to go through the financial details. Thank you, Greg. I will now provide a close look into our third quarter financial results. Before I begin, please note that all numbers are in vending returns and all comparisons are on a year-over-year basis, unless otherwise stated. We delivered solid financial results in the third quarter of 2020. During the period, our total income was $13.1 billion, up by 10.5% year-over-year, while our net profit was $2.2 billion, down by 36.8% year-over-year. Excluding runoff charges of $1.3 billion related to our C-ROM convertible notes restructuring, our adjusted net profit was $3.5 billion in third quarter, an increase of 2% year-over-year. We achieved these solid financial results during a period in which we were dealing with the residual impact of COVID-19, transitioning our business to a more balanced risk-sharing model and adjusting our annual percentage rate for APRs to keep the all-in cost for our new borrowers below 24%. Our strong performance in spite of these changes is a testament to both the resilience of our WINS model and also the stability of our earnings. Now let's take a closer look at our financial metrics for the third quarter. While our total income increased by 10.5% year-over-year, our revenue mix changed with the evolution of our business model. As we increased the funding from those consolidated trust plans that offered lower funding costs, the related income was recognized as net income which increased to 18.5% of our total income in the first quarter of 2020 from 6.5% during the same period last year. As we gradually took on more credit risks to our guaranteed companies, our guaranteed income as a percentage total income increased to 1.3% during the third quarter from 0.8% a year ago. As a result, Our retail credit facilitation service fees contributed to 72% of our total income in the third quarter as compared to 84.6% a year ago. What affected our near-term income growth relative to our underlying business growth were a number of transitory factors, including the impact from borrower early payoffs the reduction in retail credit facilitation fees recognized from loans previously funded by P2P, the reduced wealth management income due to the runoff of legacy products. These temporary tech wins will subside as we alleviate the early payoff impact by changing how we charge our borrowers as well as by taking out our legacy products. While we sustain our revenue growth, we also exercise prudence in our expense control. Although our total expense increased by 32.3% to $9.5 billion during the third quarter of 2020, our expenses, excluding the non-recurring charges for our three-round convertible notes with structuring, increased only by 13.7% year-over-year to $8.1 billion Our expenses, excluding credit and payment losses and the financing costs, only increased slightly by 6.6% to $6.9 billion from $6.4 billion during the comparable period. Our sales and marketing expenses increased by 14.3% to $4.3 billion during the third quarter from $3.8 billion a year ago. Our borrower acquisition expenses, which are a major component of our sales marketing expenses, increased by 28.9% to $2.8 billion from $2.2 billion during the comfortable period. Borrower acquisition expenses mainly represent the expenses we incur in order to facilitate loans on our platform and to generate credit facilitation fees. Those loans that contributed to borrower acquisition expenses include both new loans facilitated during the third quarter of 2020 and also old loans facilitated in prior years whose remaining balance and obligation duration cannot be relaxed. During the third quarter, our borrower acquisition expenses related to loans facilitated in 2020 increased by 11%, while the same expenses recognized in this quarter but related to loans of prior vintage increased by 38%. Our investor acquisition and retention expenses decreased by 34.1% to $198 million during the third quarter of 2020 from $251 million in the same period 2019. mostly due to the efficiency improvement in our investment acquisition process. Our general sales and marketing expenses, which mainly represent marketing staff payroll and related expenses, brand promotion costs, consulting service fees, business development costs as well as other marketing and advertising costs decreased by 1.7% to $1.32 billion during the third quarter from $1.34 billion a year ago. Our general and administrative expenses decreased by 3.7% to $642 million during the third quarter from $667 million a year ago. mainly due to our ongoing execution of cost optimization initiatives. Consistent with our loan balance growth, our operations and services expenses increased by 5.4% to $1.6 billion during the third quarter of 2020 from $1.5 billion a year ago, while our outstanding balance of loans facilitated grew by 21.4% to $535.8 billion as of September 30, 2020, from $441.2 billion as of September 30th, 2019. Moreover, an increase in our loan repayment volume led to an increase in our payment processing expenses during the third quarter, which was partially offset by a reduction in cost due to our utilization of AI technology to improve the efficiency of our loan approval and the collection process. Our technology and analytics expense increased by 9.1% to $482 million during the third quarter from $530 million a year ago, mostly due to a decrease in personnel-related expenses. Our credit impairment losses increased by 125.6% to $952 million during the third quarter from $422 million during the same period last year. More specifically, credit impairment losses from loans to customers and the financing guarantee contracts increased to $454 million from a credit of $88 million during the comparable period. As we started to take on more credit risks as part of our business model transition, Credit impairment losses related to accounts and other receivables and contact assets increased to $479 million from $163 million during the comparable periods, mostly due to the natural increase in off-balance sheet loans as well as the residual impact of COVID-19. Our finance costs increased to $1.7 billion during the third quarter from $297 million a year ago. Then we driven by the non-recurring expense of $1.3 billion for CROM convertible notes restructuring. Our debt fund was $2.2 billion during the third quarter of 2020 as compared to $3.4 billion during the same period of 2019. Our adjusted net profit, which excluded the affirmation restructuring expense, was $3.5 billion in the third quarter of 2020, as compared to $3.4 billion in the same period of 2019. Our basic and diluted earnings per ADS were both 1.01 RMB in the third quarter of 2020, as compared to 1.58 RMB in the same period of 2019. Our objective basic of diluted earnings per ADS were both 1.62 RMB in the third quarter of 2020 as compared to 1.58 RMB in the same period of 2019. As of September 30th, 2020, we have $14.4 billion in cash at bank as compared to $7.4 billion as of December 30th, 2019. Looking ahead into our four-year results, we expect new loan sales to be in the range of $558 billion to $568 billion, year-end client assets to be in the range of $395 billion to $420 billion, total income to be in the range of $51 billion to $51.5 billion, and adjusted net profit, which excludes the non-recurrency non-convertible notes restructuring expense, to be in the range of $13.2 billion to $13.4 billion. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operators, we're ready to take questions.
spk00: Certainly. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Once again, that is star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A rosters. Your first question comes from the line of May Yan from UBS. Your line is open.
spk06: Thank you. Thank you for taking my question, Greg and James. And congratulations on a steady result in a very challenging regulatory and interest rate environment. Okay, I have two questions. One is, can you let us know the IRR or effective APR in the third quarter and the recent trends in October to November for the new loans as well as the average? And if you can give us a bit of the unit economic breakdown of the loans and what's the trend for for funding and CGI cost. Sorry, this is a long question with all these operating data. And secondly, on the regulation development, what would be your response for the CBIRC recent sort of criticism about, you know, bundling of the PNC insurance products the high interest rate charge in your partnership with the industrial bank, what would be the approach that you try to resolve those? Thank you very much.
spk04: Great. Thank you, May. It's Greg here. What I'll do is I'll take your second question first, and then we'll come back to the details on the first year as we pull the numbers together for you. On the question of the regulatory issue, as you know, what was highlighted really was the question of whether or not there was any sort of bundled sales. And we've investigated that carefully. From a legal perspective, there's actually no clear definition of that. but the regulators may have a different interpretation. And nonetheless, what we've done in recent weeks is to adjust that process so that customers have clear choice and so that there is clearly now on the platform no issue around the bundled sales question and customers do have the choice and the right to choose which insurer or guarantee that they deploy. I think that there's an important sub-question in there, which other people may also have, which is there was some highlight around the APR itself. And our understanding really in the broader market environment really since post the court guidelines issued in August that the current view very much that the funding is coming from financial institutions that the acceptable rate is 24% or below. And we think that's not something that is likely to change in the near term. And it's something that really has been backed up by many court cases in the last couple of months as people have gone to see if they can actually get their funding reduced or their interest rate reduced. And it's been backed up so far at 24% or below. Having said that, You know, one of the things that we mentioned in the course of the roadshow looking forward, we will take every opportunity where we can optimize operating costs and funding costs to pass on lower rates to customers while protecting our net profit margin. And so that remains a continued focus that we will work on in the future as needed. But, again, I really don't believe – that the 24% number itself will see significant change in the near term. With that said, I'll turn it back over to Wyatt. Do you want to go through that? Yeah, so let me answer your first question, and then I may want to supplement about the question to Edouard. The first question is about our IRR trend. If you look at our third quarter, our average HR for all secured loans was 26.5%. But I believe you want to know about what's the HR level after we reduced price down to 24% what we owe, half of December 4th. So if you look at our new loans in October, referring to October number one, Our current average price once you loan is 22.4%. And then why the funding costs remain not much changes at 6.7%. And the CGI premium decreased a lot because now we are switching target market to a better product to our prime segment. So CGI premium is now at 6.5%. So those are key numbers to answer your second question. First question. First question, sorry. And the second question is about the recent notice by the State Council at TIIT. It was about our past. The Council group in May 2019. And I see that there are basically three points. The first is bundled space. And as Greg said, we believe this is not for the sales, but no matter what, the following CDIIT's window guidance, we already changed our sales process from October. So we let our borrowers choose influence companies from the application. The second point is about 1% guaranteeing. That as we shared during our ITO Roadshow, we already have a plan to gradually increase our sales guarantee portion from 1% to 20% by the end of next year. And then if you have a look at the October number, it's already 10%. So this is not something new for us. And then lastly, about the price, again, this is secured loan that we booked May last year with 22% HR. And then for secure loan, as of today, our price is 17% on the lower and also unsecured with greatly reduced price down to 24% following, strictly following CBIS's window guidance starting from September. And then also, if you look at the recent court decisions, we are monitoring about more than 4,000 court cases and more than 90%. It's very clear. They use 24% as a standard, as a basis, to make a decision on financial lending institutions, the HR dispute. So it's very clear that 4% is becoming a market standard for financial institutional lending. And then we don't have any further resources from GDIC about the pricing, so we don't have any plan to further reduce price in the short time.
spk05: your next question comes from the line of winnie wu from bank of america your line is open hi thank you very much uh just just want to clarify uh maybe i didn't get it very clearly uh what's the uh third quarter versus september uh funding calls cgi premium and an epo uh uh sorry could ys please repeat that uh that's the first first question Secondly, I think there are investors concerned about recent U.S. regulation or regulators talking about tightening the standard on the ADR. Just want to ask the management plan or thought on the potential risk of ADR delisting and the scenario of coming back to Hong Kong either for a secondary listing or possibly do a primary listing. Thank you very much.
spk04: Okay, the first question. The funding costs remain unchanged from second quarter to third quarter. It's at 6.7%, while credit insurance premiums charged by insurance partners decreased from about 9% down to 6.5% level. And if you look at, if you measure the EPO by The actual amount divided by the billion loan balance is around 8% every quarter. It has been very scary. Second quarter, third quarter, I don't see any change. But knowing that, starting September, we greatly changed our target market. For those new segments, we have to wait and see how they perform differently in terms of our ETO behavior that we have to monitor. Okay. On the question of the recent, what's termed as the Kennedy bill, in the U.S. Obviously, this is an expected item going back a number of months now. If you look at that bill itself, obviously, it is laying out a three-year period in which you have to comply with the disclosures. What we would note is that at least the initial response that you see in the media from the CSRC is trying to, I think, proactively be ready to address this. So I think in the broader context, we do believe that a solution will be found. Having said that, there is also, we believe, some statements that will appear from our understanding of the process with the SEC that is looking to create terms around a co-audit process. So for example, if you're The auditing firm is the global firm that has a China team. It also has a U.S. national team. What would happen under this co-audit setup is the national U.S. team would have to review the results and be accountable for whatever working papers are done by the China team. So this co-audit process is something that we think will also potentially be put forward by the FTC in the near future. But just to reemphasize, in whatever outcome, whether it's the Kennedy bill or any changes that are further refined by the SEC, we do have a three-year period, which gives us more than ample time to make any other preparations in terms of other listing options down the road. We don't have any immediate plans for additional listing, but obviously we have a fair bit of flexibility there.
spk05: Thank you very much.
spk06: your next question comes from the line of elsie cheng from goldman sachs your line is open good morning greg bias and james and congratulations on the solid quarter and thank you for taking my questions um i have two questions here first is with regard to the macro and regulatory environment in china currently i know we'll just talk about the recent cbi rc comment and looking forward uh what do you see are the potential risks as well as opportunities to lose x And could you also share a little bit more in terms of what's your business expansion planning in this environment and changes versus two months ago? And the second question is really about our customer strategy. Following the updated pricing and customer strategy implemented in September, in addition to the APR trend we just talked about, could you also share with us more on how has it been working out on the sales efficiency front and the trends we're observing there? Thank you very much.
spk04: Okay. I think on the regulatory side, although there has been really no specific announcement or no specific requirement issued by any regulator today, you know, what we do understand is the regulators are clearly, if you look at the draft that's come out for the microfinance institution, their real focus here is on platforms that are cooperating with banks to have more skin in the game to bear more risk and to have sufficient capital to back up that risk. That is clearly the main focus. And while that has been clearly stated for the microfinance model, how it would apply to other business models in the market, including our own, to be honest, there is no clear statement yet. But as we disclosed when we were going through the IPO process, You know, we are, as Wyatt highlighted, you know, by the first half of next year, we would hope for all new loans that we will be taking, you know, 20% in the mix. Whether that 20% could be changed, and some people have asked for the 20% to become 30%, that's something that we will have to monitor. If it were to be slightly more, from 20% to 30%, we have more than adequate capital to handle that, including the recent IPO. So we think... It will take a little bit of time for the regulators to really form a clear view for the industry as a whole across business models. We understand regulators are working very hard on this issue. We also hope that there will be an answer in the near term, but we're also reasonably well prepared for any eventualities. Maybe on this question for regulation, I'll ask Chairman Gee to also make a few comments.
spk03: I'm sorry. I think all the investors are very concerned about this matter. So I think I will ask you later. I think you need to systematically report our current information, our basic conclusions, and our basic measures to everyone.
spk04: So this is Chairman Ji speaking. Given I think that regulatory will be a great concern for many analysts and investors, you may ask for the questions. I will now provide a systematic overview of what we think of the regulatory environment is and our responses.
spk03: This is about the regulatory environment. We think that due to the influence of the ants, the regulatory direction has changed suddenly. Firstly, due to the anti-win, we think there has been a sudden turn of the regulatory direction towards that anti-win. And there are two major changes. And the first is the tightening of the overall regulatory environment.
spk04: And the second is a comprehensive and go through to the level of the regulation.
spk03: In the past, we have seen a lot of tolerance for innovation, which now today the regulators are a lot more cautious. Before the IPO, our biggest challenge was probably to deal with the four times LPR rules. And post-IPO, today, our biggest challenge is to get a clear view of what the regulations are having and what the regulators are currently thinking about. No doubt the whole time LPR at the time of RTO and today's regulatory changes are the biggest uncertainty we're facing out there. Because of the uniqueness in China, when we talk about regulators, we don't necessarily just mean the CBOC, the CDRC, and the CRRC. We have to take into consideration the state council and the government.
spk04: And as you can see, the four times LPR was not a rule set up by the traditional financial regulators, such as the PBOC and the CDRC and CSRP, who were issued by the Supreme Court.
spk03: So this is what the major changes we have kind of seen at the various regulatory bodies today. Secondly, I want to talk about our responses and what we're going to do about it. We think the major areas of concern for the regulators are in the seven areas. The first is overall cost for borrowing.
spk04: Secondly, what are the final sales? Thirdly, our leverage. Fourthly, our leverage. And four, is operating within districts or across different districts?
spk03: Number five, the lowest time for funding providers that they play in this whole process. Why do they do their own underwriting or they outsource it to others? The seventh aspect is the control of the use of the loan funds. The seventh aspect is consumer protection. In fact, it refers to the control of complaints, the improvement and handling of complaint rates. And the seventh and last point, the consumer protection. And this is mainly reflecting the number of complaints and what we're doing about those complaints. What is our policy? And here is what we're going to do to combat these concerns.
spk04: First and foremost, we need to try to understand the regulators' intention and what they intend to do. And one month after we did our IPO, we have been engaging, having very frequent dialogue with different regulators to try to understand the intent.
spk03: And not only were Lufax management involved, Ping An senior management level was also involved in this process. We were hoping to get a clear steer from the regulators while they're heading next, especially any impact to our business model and profitability model. So we can tell you that up to now, all the supervision departments are still discussing and researching the following actions. I think that our model is different from that of MAI. So the supervision can also pay attention to this point. So the supervision will finally come up with a comprehensive policy. In fact, we have not yet made a clear and clear decision. So far, the various regulatory bodies are still discussing on what they're going to do next.
spk04: We do believe our business model differ from Ant, and there are certain recognitions from the regulatory bodies on that point. So I think they're still discussing. They are not 100% clear on what exactly they're going to do next. So all we can do is, again, anticipate the future direction and assess our business model accordingly before they hit us. So in this process, we need to make changes in advance. Despite not knowing exactly what the future rules may be, we are now reasonably clear of their intent and therefore we will be pre-positioning our businesses accordingly so we are prepared when the rules are finally out.
spk03: So far, we believe we have an efficient line of communication with regulators, and we think the feedbacks are friendly. This is all we can say at the moment. I will continue to do these communications. Thirdly, I want to say our communication to the capital market, including our investors, we have a principle of the management will always be open, transparent, and honest with the capital market. I think we need more response and experience.
spk04: So this is all we have, and I have shared everything I have with you today.
spk03: And if there are more developments, rest assured, we will be the first and foremost to let you know. We do think the regulatory environment is getting tightened and is changing rapidly. Therefore, we'll remain vigilant in Washington State.
spk04: Okay. Wyatt, for the second question, do you want to make a comment? Yeah. Let me answer this question by providing a few numbers. So since we shifted our target market from September 4th with a lot lower APR, then the results turned out to be very positive for our new sales. If I share October and November, recent two-month numbers, October despite we had 10-day holidays, our new sales volume was more than $45 billion a month. And in November, we cost $50 billion a month. So YTD November, our total annual sales is about $530 billion, which is surely ahead of our target. And as a result, our sales productivity increased by about 9% from second quarter to third quarter, and while our channel mix stays, remains unchanged, 50% from direct sales, 40% live agents, and 10% from telemarketing online. So, so far, it's very promising for our state's volume delivery.
spk06: Got it. Thank you, Chairman Ji, for taking us through the regulatory concerns transparently. That's very helpful. And thank you, Greg and YS2, for the insights on the business. Thanks again.
spk00: Your next question comes from the line of Benny Wong from HSBC. Your line is open.
spk06: Hi, congrats management on the starting quarter and also successful IPO in the first quarter as a corporate company. There are two questions we have here. One is actually on the credit risk exposure. We understand that management commented that will increase the credit risk exposure to 20% level as communicated during the IPO. Is there any plan you think that we need to also step up further to 30%? to be just in line with the requirement under the co-lending in the draft regulations? If so, how do you think that will change, impact the tick rate for the credit facilitation business? That's question number one. How should we see that would impact, say, maybe any magnitude you can give in terms of how the increase in the credit risk exposure will translate into the increase in the tick rate? And the second question is that if you look at the recent notice by the CBIRC saying that the 22% of the APR of loans arranged by Rufrecht and the industrial bank has a PADP quite high, understand that we are lowering the APR of all new loans to below 24%. So if the stance from the CBIRC will put further pressure to lower the APR further in the near future,
spk04: uh what is the plan that we have been thinking of so far and um again how does that impact uh take place thank you okay uh yeah so before talking about credit exposure uh i think uh i want to share the october number because if you look at if you report the number the outpatient is very clear so um the october total change volume Our self-guarantee portion already up to 10% for October one month usage volume. And then P&T, the CVGI portion decreased greatly from above 90% down to 77%. And while the rest, 13%, are taken by partner banks directly. So our model change is very clear. And as Greg said, Open to our plan, we want to achieve 20% self-generated portion by the end of first half next year for new ones. And then whether we think we can increase this further to 30%, we don't know yet. We haven't decided yet. If you look at that internet loan management rule announced by home security, yeah, it said for small and company joint lending, they need to take up to 30% credit risk. But that's not for a guaranteed company. That's for a small company, which we are not using now. But if 30%, in case 30% becomes market norm and the new standard for this joint lending, no matter you use small loan license or insurance license or guaranteed license, if that happens, then we believe we have modern architecture to support the 30% guarantee because As of today, if I'm not mistaken, we have about $11 billion net assets on our guaranteed company. And then through organic profit goals, this net asset will increase to $25 billion by the end of next year. So surely we can take up to 30% credit risk for neurons without having any further capital injection. So we are confident. And then how this will affect our take rates. It will not affect much. It will rather be positive to our take credit because when you take more credit risk, it always comes with more revenue and then more net margin. And the second question about the price, 22.16%. That was, again, secured loans. We booked May 2019. And secured loan, our average price as of today is 70% with great reduce. and unsecured less than 24%. And then how far do we want to go down? We don't have any plan to reduce dramatically in the short run because we are not clear about, we haven't got any further instructions from CDIC, but according to our original plan, we plan to reduce our highest APR from 24% further down to 20% within three years' time. So our plan remains unchanged.
spk06: Okay, great. Thank you. Thank you so much for the answers. Very clear note.
spk00: Your next question comes from the line of Thomas Chong from Jefferies. Your line is open. Hi.
spk01: Good morning. Thanks, management, for picking my questions. I have a question about the work management business. Can you comment about our competitive edge? in automated portfolio and returns versus other providers? Thank you.
spk04: Thank you, Thomas. I'll just retake the question so that everyone can hear it. It was a bit faint. So the question was, on the wealth management side, our competitive advantage in the portfolio services that we offer. I think I would outline the answer in two parts. Up until now and in the future, Up until now, as you know, our portfolio services in terms of scale are north of $10 billion revenue, which makes us one of the largest in the market. And the way that we've been able to achieve that is by creating a very transparent means online for customers to understand the benefits they get from a diversified investment approach. And we have now designed more than 16 different strategies for different risk appetites in different market environments. And we have also opened the platform to external providers, securities firms, and other fund houses who are also offering portfolios so that we can match the customer. So I think up to now, What's a lot of to be successful is understanding our customer segments well, having strategies that are well positioned against those segments, and also in terms of our online interface with investors, getting them to understand the benefits of doing so, and also helping them transition across portfolios as the market environment changes. Roughly, on the portfolios that we played a role in helping design the strategies, the year-to-date return is an average of about 12%. And so that sort of steady return together with the customer interface I think has been the key to success up to now. If we look going forward, what we are doing is continuing to deepen the design on the tech side to really improve the after-investment service so that customers can really understand how their portfolio is performing, how it's being related to accommodate different market environments, and how adjustments can be made for them to optimize. So really the service element in a totally tech-driven environment is It's something that we are building out very quickly, which I think will maintain a unique position in the market. The other thing from our discussions with regulators in terms of where they want to go with the advisory business in China, I think where they're starting to come out more and more is they see the advisory business as a business that's best offered to customers that can maybe invest 50,000 renminbi or 100,000 renminbi or more. And so that's where diversification really makes a difference for customers that can invest that minimum amount. So our ability to bring the technology, and then given our customer segment, which is indeed sort of the middle class and emerging affluent, there's a very good match there that we enjoy that other platforms may not enjoy to the same extent. So our advantage up to now has been designing it simple, matching the interface to the front end for customers as well. Going forward, it's about deepening the technology. on the post-investment side. It's about creating more portfolios that are increasingly data-driven against the market environment. And then finally, we think that, you know, our segment will stand out in our ability to match these sort of services in the market as a whole.
spk00: Your next question comes from the line of Richard Xu from Morgan Stanley. Your line is open.
spk02: Thank you for taking my question. I have a question on the progress of essentially make banks take risks on their own. I think, you know, there's a plan to gradually reduce the GMC insurance guarantees and ask the banks to take more questions, more risks directly. I just want to know whether there's any progress during the third quarter, any targets for this year and next year. And then maybe second question, do we have any guidance currently for 2021 at the moment? Thank you very much.
spk04: So Richard, on guidance, we will provide guidance as a whole when we report the full year results. So that will be coming soon. I think your first question was really about, and I'll ask Wyeth to restate a bit, around the evolution of how much risk we're taking, how much risk P&T is taking, and how much risk is being directly borne by the bank. So maybe, Wyeth, you can restate around the trend for September, October. Yeah, if I look at the October number, because September number is not that obvious. So if you refer to October number, the out-of-portal neurons, the risk-bearing portion, sharply 10% by Lupex, and then 77% by Ping An PNC. You remember, we used to go above 90%, so sharply decreased down to 77%. And the rest, 13%, are mostly taken directly by partner banks. So our future, the transition direction is very clear. So we want to increase our risk-taking portion up to 20%. And then insurance companies, we reduce down to about 40%. And then while banks are taking the rest, 40%, with credit loss responsibility. So that is our direction. And then we want to achieve that. If all is well, I can do the first half next year on yours.
spk00: Once again, if you would like to... Sorry, go ahead.
spk02: Yeah, I just thank you very much. I think that's a decent progress already. So looking forward to progress on that front. Thank you.
spk07: Thank you, Richard.
spk00: Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Once again, that is star, and then the number one on your telephone keypad. Your next question comes from the line of Hanson from CLSA. Your line is open.
spk07: Hi, good morning, management. Thank you for taking my question. I've got a couple questions regarding wealth management segments. So the first thing is that the take rates are in the current product were actually went up in the short quarter. So can you elaborate drivers behind this? And more particularly, we would like to know the product mix. If you can share the product mix change, that would be great among the current products. Number two is that I think, previously, there is a plan for us to apply for a mutual fund investment advisory sort of license. Just want to know what's the progress of acquiring this license. Number three is about the regulation related on the wealth management segments. We understand that overall regulatory environment for wealth management is actually quite favorable. But recently, there are some rising voices in the media, especially highlighting by one of the CDRC officials talking about the potential tightening of online distribution of deposit products. So for us, I think these kind of online deposit products from banks account for 30% of our current products. So I just want to understand... What's the impact for us, and do we have any plan to prepare for this change? Yeah, that's all my questions. Thank you very much.
spk04: Right, thank you. So on the mix, actually, we have seen a general increase across all products, but we have also seen a lift from more high-end products related to equity-related products and trust products uh... as well but it didn't it is a combination of a look across the board work with the historical period we're comparing again but also an improvement in the mix of higher-end and equity related products uh... going forward this is something we will continue to emphasize uh... and we will continue to emphasize around uh... the portfolio advisory services which we believe will generate higher fees uh... and i think we've mentioned uh... prior we will uh... take more effort to building out the insurance product line as well, which will continue to support take rates over time. So this is something that's ongoing, and we will expect to continue to have positive evolution as we look forward in the next 12 months as well. On the question of the private license and the final license for advisory services, where we believe the regulators are going at the moment is to extend the pilot period and to extend the pilot participants. And we have made our submission of our license in this regard, and we're hoping that as soon as possible we'll get more clarity on the ability to obtain that license. The actual long-term license, for financial advisory group there. There was initial hope in the market that it may be, the requirements may be announced by the end of this year. We'll probably go later into the first half of next year, but it's something that we are working very hard on to be ready to obtain.
spk03: And then the third question. Yeah. Chairman Xi was just adding, in the
spk04: process of getting a pilot license, our lineup in the list of potential participants is improving as we continue our communications and demonstrate our capabilities. So that's something that we're still very hopeful of. On the third question of deposits and deposit distribution, as of today, the total deposits that we've helped facilitate is probably about, it's not quite 30%. If you look at the total AUM today of $370 billion, I think it's about $750 billion there, so it's about 25% of the total AUM. We anticipate that there will be stricter guidelines coming out probably in the next couple of weeks as late as the next month or two, right? So over the next couple of weeks, we may see more clarity coming from the TVOC. We believe the market will continue to exist in terms of platforms working with banks. We believe that the regulators will probably provide more guidance on what level of pricing the banks can offer. They will also probably provide more guidance on which types of banks are able to continue to increase their deposits through online platform cooperation. which we think is, if you take a longer-term view, probably a good development, because it really makes sure that deposits are going quickly into banks that have the right risk structures to bear this. And I think, again, the focus of the regulators here is on managing overall macro risk and systemic risk. And so we do think that this market, it'll probably not grow as quickly as it has in the past, given these changes. But we also, anticipation of this, are advancing our cooperation with many of the new bank asset management companies that are in the market. We do believe that the product sets that are in those licenses, in those entities, will probably serve as a good replacement, alternative, for the deposit-like products that are out on the market today. So with a combination of maybe optimizing our mix of the banks that we cooperate with, meeting any requirements on disclosure for investors in those products, as well as continuing to shift product mix with the advancement of the bank asset management guidelines, we will be able to continue to optimize the mix. Great. Thank you very much.
spk00: There are no further questions. I turn the call back to management for closing comments.
spk04: Right. Well, thank you. Thank you, everybody, again, for participating in today's call. I think one important point that Chairman Gee made is obviously we remain in an environment where there will be new information coming. Where that new information is relevant material, we will certainly do everything possible to make it clear with regard to how any impact it may have on us. So, again, thanks, everybody, for the attention.
spk00: that concludes today's conference call you may now disconnect
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