Lufax Holding Ltd American Depositary Shares, each representing two (2) Ordinary Shares

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.

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.

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.