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

Ladies and gentlemen, thank you for standing by and welcome to the Lufix Holdings LTV second quarter 2021 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 very much. Hello, everyone, and welcome to our second quarter 2021 earnings conference call. Our quarterly financial and operating results were released by our Newswire services earlier today and are currently available online. Today, you will hear from our chairman, Mr. Qi Guangheng, who will start the call with some general updates on our achievements, share our thoughts on recent regulatory developments and industry dynamics, and provide our plans for future business. Our co-CEO, Mr. Greg Kip, will then provide a review of our progress and details of our development in the quarter. Afterwards, our CFO, Mr. James Jones, will offer a closer look into our financials before we open the call for questions. In addition, Mr. Weiss, our co-CEO, and Mr. David Choi, CFO of our Retail Credit Facilitation business, will also be available during the question and answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, and we'll be making forward-looking statements Please also note that we will discuss non-effortless measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in our earnings release and filing to the FTC. With that, I'm now pleased to turn over the call to Mr. Yi, Chairman of Lufax. Hello everyone and thank you for joining our 2021 second quarter earnings call. I will start with some general updates on our achievements in the first half, then share our thoughts on recent regulatory development and industry dynamics before providing our plans for future business. First, updating the first half. Generally speaking, all the Chinese ADR stock prices have seen increased volatility recently due to changes in macro policies and market conditions. At LuFact, we managed to deliver improvements in our operating performance, regulatory compliance, and corporate governance in the first half. First, we achieved high-quality growth in our core business. For the first half, our total income increased by 17% year-over-year, and net profit increased by 33% year-over-year. Later in the call, Greg and James will elaborate more. 其次,若控基金响应监管的要求,在二季度基本上完成了P2P的产品清零,实现网贷业务良性平稳的推出,业务合规性进步加强。 Second, we responded to regulatory calls by phasing out our peer-to-peer product in a smooth and compliant manner. In the second quarter, we substantially completed the runoff legacy peer-to-peer product, and further strengthened our regulatory compliance. Third, the control and management of the company is constantly improving. High-efficiency has completed the reorganization of the board, set up risk control, consumer protection, and ESG and other key areas of the system committee. Third, we continuously enhance our corporate governance by restructuring our board of directors and establishing committees in key focus areas, including risk management, consumer protection, and ESG. We will also be actively advancing the establishment of our ESG system. Fourth, the company announced a $300 million stock repurchase plan on May 24 this year. Until June 30, this repurchase has been basically completed. The entry-level management team also completed a $5 million refund with free funds. Fourth, on May 24, 2021, our company announced U.S. $300 million of share repurchase. As of June 30, 2021, we have substantially completed the repurchase. In addition, our senior management purchased U.S. $5 million worth of shares using their personal funds. Although the market is still uncertain, While there are still uncertainties in the market, our stable profitability strong operating cash flow, abundant cash reserves, and the actions we took to pivot our business based on our understanding of regulatory requirements all give us strong confidence about our future prospects. As such, I'm pleased to announce a new share repurchase program of US$700 million over the next 12 months. bringing our total price program to US $1 billion. In addition, we are actively evaluating other options to return shareholder value going forward. Second, the analysis of regulatory development and market dynamics. Since the release of the third quarter report, the country has continued to intensify its monitoring of the platform economy, including requiring the network platform's personal information to be directly linked to financial institutions, controlling the personal loan rate within 24%, and issuing a global opinion guide on how to monitor the security of the network, etc. Since our Q1 earnings announcement, the Chinese government has continuously tightened supervision of technology platform companies. These include the direct sharing of borrowing information by online loan facilitators and co-lenders with financial institutions, mitigating an all-in cost ceiling of 24% for consumer loans, and publishing the draft version of the amended cybersecurity real measures for public consultation. Lufac has always been close and constant dialogues with regulators to fully grasp the latest regulatory trends, intentions, and requirements. and make sure relevant authorities are fully aware of our business model and development in key areas. I'm pleased to report that so far we have maintained open communication lines with all levels of regulators with satisfactory frequency and results. Despite recent influx of new regulations and policy interpretations, our business has not been materially affected. Moreover, our business model offering results have remained resilient. Now I will address a number of questions that attracted recent attention. The first topic is the sharing of borrowed data by loan facilitators and co-lenders directly with financial institutions. The first topic is the sharing of borrowed data by loan facilitators and co-lenders directly with financial institutions. The recent media reports speculated that the CBIRC will prohibit online credit facilitation platforms from sending directly to their partner financial institutions forward data. including personal information voluntarily submitted by borrowers, data generated as part of the platform's process, and other borrowing information provided by third-party vendors. Our incorporation is that it aims to regulate the consumer credit scoring process, emphasizing that credit assessment data from internet platforms must be transmitted solely to licensed credit agencies. They can be used as a medium-sized insurance company, and they can be used for retail business. They can be used for retail business, and they can be used for retail business. They can be used for retail business, and they can be used for retail business. They can be used for retail business, and they can be used for retail business. LUFAC has been utilizing its licensed guaranteed company to conduct its retail credit facilitation business and perform credit assessment authorized by our partner banks. In full compliance with the banking sector financial institution and financial guaranteed company business cooperation guide, we refer potential clients to our banking partners, transmit the guaranteed company's approval results, and share timely updates on post-origination repayment status. As such, every aspect of our business cooperation is standing in accordance of the current guide and is thus different from an unlicensed company's loan facilitation model. In the meantime, we will have constructive dialogues with the regulatory authorities to seek their feedback and guidance. We are also prudently exploring the viability of applying for a credit scoring license or cooperating with third-party credit scoring companies. Because the mandatory completion of credit scoring reform is set to the end of 2022, there should be sufficient time for both regulatory authorities and market participants to test new models and make adjustments. Based on currently available information, we believe whether to cooperate with third-party credit scoring companies will not materially impact our business model or profitability. The second topic relates to consumer borrowing cost. The second topic relates to consumer borrowing cost. From September last year, Rukong began to set up in advance, actively reducing the cost of new loans to 24% Next, the company will deliver the trend of supervision, actively exploring and applying technological methods to solve the problems of small and medium-sized enterprises, financing difficulties and financing costs, and increase the operating efficiency to ensure the company's profit and loss level. At the end of July, some media reported that regulatory authorities would require financial institutions, including consumer finance companies and banks, to implement an all-in cost ceiling of 24% for personal lending. From our perspective, we think that this new requirement has crystallized the direction of loan pricing and eliminated potential uncertainties. Since September 2020, we have been preemptively implementing an all-in-cost ceiling of 24% for all new loans we facilitate. Going forward, we'll continue to follow regulatory directions, leverage technology to broaden small and micro business owners' access to cost-effective financing, and maintain our own profitability by improving our operating efficiency. The third topic I would like to discuss is cybersecurity. Since July, regulatory authorities have been conducting special orders on several internet platforms in accordance with cybersecurity review measures, demonstrating the nation's heightened attention to cybersecurity and data safety. Wacom has organized a learning and development inspection in the first period of time to ensure that our business-level data processing activities are legal and legal. Wacom has passed the certification of the International Information Security Management System, ISO 27001, and obtained the national Ministry of Public Security's standard of information system security protection for three cases. To ensure full regulatory compliance about data processing business operations, we promptly conducted debriefing seminars and performed internal reviews. LUFAC achieved the internationally accredited ISO 27001 certification for information security management and the Level 3 registration certificate from the Ministry of Public Security of China. Going forward, we'll continue to strictly adhere to policy requirements and ensure regulatory compliance in all key aspects of operations, such as network equipment and service procurement, critical data reviews, and many others. The fourth topic is market development and competitive dynamics. In recent years, a number of Internet platforms and traditional financial institutions have jumped into the foray of serving small and micro business financial needs. Some platforms have started to copy the old-school business model that we pioneered. On the one hand, this validates the attractiveness of our business segment and the effectiveness of our auto model. On the other hand, intensifying competition challenges lose factors to perform even better. We believe that in the past 16 years, Rokon has already established an efficient offline team, developed a complete management mechanism, and developed a wind control model that meets all market challenges. These results are our strong business core. It is difficult to copy the industry in a short period of time. Over the past 16 years, we have built a highly effective offline sales and service team, a comprehensive management system, and a proven risk management model stress-tested over multiple market cycles. That combination serves as high barrier to entry and precludes peer replication within a short period of time. At the same time, increasing competition also motivates us to work harder, ensure regulatory compliance, innovate with prudence, advance our technology, and fortify our industry leadership. Third area, development plans for the future. based on our analysis of regulatory intentions and industry dynamics, we believe competitive focus will gradually shift from volume growth to quality growth. Consequently, we are determined to uphold the following three principles to keep our operations fully compliant, to create value to society, and to advance our technology. 第一,堅持貫徹合規經營, 堅決執行監管的要求。 由於金融DNA可對合規的高度重視, First, we shall keep our operations in full regulatory compliance and strict policy adherence. As an organization with financial DNA, we have always prioritized regulatory requirements. and operated in a compliant manner. Based on our principles of preemptive diagnosis and swift operational adjustments for timely, optimal results, we plan to continue enhancing our communication with regulatory authorities so that we can keep a close tab on the course of regulatory development and timely execute our policy requirements. Second, we must create social values and serve the small and medium-sized organizations and central agencies. Second, we shall keep creating value to the society by providing quality financial services to small and micro-business owners as well as the middle class. As of June 30, 2021, Lufax had cumulatively provided credit facilitation services to more than 15.5 million borrowers, with an outstanding loan balance of more than 600 billion RMB. Over the past five years, we have effectively satisfied small micro-business owners' financing needs by facilitating nearly 2.3 trillion RMB worth of loans. At the same time, we have also launched specialized small and medium-sized assistance projects, mainly for the retail industry, the food and drink industry, the manufacturing industry, and other labor-intensive industries, to create a large number of jobs for society. In support of rural small and medium-sized businesses, we cooperated with the Chinese Women's Development Fund, and distributed agricultural funds to women entrepreneurs and cooperatives in rural areas, and supported rural revitalization. Recently, we launched special assistance plans for small and micro companies, mainly aimed at supporting companies in labor-intensive industries, such as retail, hospitality, restaurants, and manufacturing, creating a significant number of employment opportunities. For small and micro agriculture businesses, we are working with the China Women's Development Foundation to distribute our Farmer's Assistance Fund to rural female entrepreneurs and cooperative leaders. As a result of this work, we are making meaningful contributions to the economy of rural areas. 未来,路控将提供更多符合小微企业组需求的产品,通过科技更高效地触达小微企业组,简化申请流程,提高审核的效率,进行普惠金融,服务实体经济。 Going forward, LoopX will provide more products and services catering to the needs of small micro-business owners, leverage technology to reach customers more effectively, simplify loan application process, improve efficiency in reviewing and approving online loan applications, fulfill our commitment to financial inclusion, and support the nation's economic development agenda. In our wealth management business, Lufax operates as an information and empowerment platform to help the Chinese middle class manage their wealth. LoopX will continue to provide a variety of financial products, optimize product matrix composition, enhance customer experience, improve service quality and efficiency, and contribute to our clients' wealth preservation and growth goals. Thirdly, we shall empower our business development and quality improvement through technology. In adherence to our principles, auto integration, multi-service offering, and customized solution, we have continuously advanced our technology in big data, artificial intelligence, and others. In retail quarter facilitation, we have launched an AI-powered slot loan solution named Xingyun. In wealth management, we are promoting an intelligent customer service solution aimed at improving user experience. All these solutions demonstrate our ability to enhance our financial services efficiency by leveraging technology. In summary, although the future road is full of challenges, as long as we insist on implementing the rule of law, insist on creating social values, insist on improving the road of technology and the level of technology, we believe that the road will definitely lead to a successful road with its own characteristics. In conclusion, although our road ahead is not without challenges, we are confident that we will be able to lay our own unique path to long-term sustainable success by maintaining operational compliance, generating social value, and continuing technology advancement. With that, I will now turn the call over to Greg, who will share our business updates for the quarter. Thank you, Chairman Gee. Although the regulatory environment continues to transform and some uncertainties remain, our business performance is sound. Let me get straight into the key figures, noting that all numbers are in R&D and all comparisons are in a year-on-year basis unless otherwise stated. Our profits in the first half reached $9.7 billion, up 33.4% versus a year ago. Our second quarter profit was $4.7 billion, up 53.2% versus a year ago. Our second quarter revenues of $14.8 billion grew 17.3% versus last year. Our second quarter total operating expenses of $7.1 billion decreased by 1.7% for the same period. As a result, our net margin reached 31.9%, a 7.5 percentage point improvement over the second quarter last year, driven by ongoing improvements in operations and technology. We are confident that profit growth levels in the first half will be sustained throughout the balance of this year. On the back of this solid performance, it is important to note our strong balance sheet and cash position. As of June 30th of this year, our net assets reached $91.1 billion, of which approximately $42 billion are liquid assets maturing in 90 days or less. Our net cash flow has increased by $9.6 billion in the last 12 months. This strong position allows us to do several things. First, it provides us with a resilient ability to meet any new capital requirements that may come from regulatory changes. We believe that in lending facilitation, all platforms, regardless of business model or customer segment, will ultimately be required to bear 20% to 30% of related credit risks with a capital leverage of no more than 10 times the proportion of shared risk. In the second quarter, excluding the consumer finance subsidiary, we bore credit risk on 16% of all new loans facilitated, and we have more sufficient capital to increase levels if needed. Second, our strong profitability provides multiple avenues to generate value for shareholders. Today, we announced that we will extend our corporate buyback program, initiating a new plan to repurchase U.S. dollar 700 million of shares over the next 12 months. We continue to explore other avenues to return more value to shareholders over time. Third, our resources allow us to continue to invest in and enhance our unique business model. For the sake of general understanding, I'd like to highlight three aspects of our business model and the developments currently underway. First is our unique O2O direct Salesforce business model, which allows us to unlock the unmet borrowing needs for China's small and micro-business owners. In the second quarter, excluding the consumer finance subsidiary, 77.6% of new loans facilitated were to small business owner segments. We continue to find that our direct sales force of more than 58,600 professionals is the key to reaching the small business owners. And building required levels of trust serve their larger and long-term lending needs and being able to match an array of unsecured and secured products to their diverse business and industry purposes. In the second quarter, new loan sales reached $152.7 billion, growing 11.1% versus a year ago, in line with prior guidance. During the quarter, new loan sales from other channels slowed down a little. However, the increased new loan volume from our own direct sales teams has offset the weakness in other channels, thus demonstrating the resilience and flexibility of our direct sales team as well as the strengths of our O2O business model. Furthermore, with continued technology upgrades, we have greatly improved the productivity and efficiency of our direct sales teams. In the second quarter, 6.5% of new loans facilitated were in a new secured auto lending product, demonstrating the ability of our OTO direct sales to capitalize on changing market conditions and customer relationships. The productivity of our direct sales force increased 10% over the last 12 months. We continue to invest in new risk, data, industry insights, and technology tools to further enable our unique O2O sales force to tap this hard-to-reach segment, which we believe could not be efficiently served through a pure online model. A second unique aspect of our business model is how we deploy our licenses. This has become an increasingly important factor in the tightening environment to satisfy both regulatory and funding partner needs. All new loans that we facilitate today either flow through our guaranteed companies or our consumer finance license. Our guaranteed companies with operations all over the nation except Tibet, Minsha, and Yunnan provinces allow us to share credit and process data flows with our more than 65 national and local funding partners under well-established legal frameworks. The deployment of these licenses together with successful tapping of the ABS and interbank ABM market has helped the ongoing optimization of funding costs for the first half this year. We are now actively exploring new collaboration to meet expected credit rating license usage requirements that will come into effect by the end of next year. A third unique aspect of our business model is that we seek to serve our customers across a full range of financial services, not just lending. While our wealth management platform is a smaller contributor to total company revenues today, the China wealth management market is witnessing substantial new growth as customers and providers are adjusting to full implementation of the new asset management regulations and a new framework for cross-border investing between China's Greater Bay and Hong Kong. Our domestic wealth of insurance serving primarily the affluent The emerging affluent continues to grow with client assets of $421.1 billion as of June 30, 2021, expanding 12.4% versus a year ago and expanding by 28.8% if excluding legacy P2P assets, which have now been substantially run off. Our platform in Hong Kong is currently entering new partnerships in preparation for the rollout of greater-made policies. In the third quarter of this year, we will merge our online client interface for all followers and investors to deepen services to all customers across small business owner lending, consumer finance, wealth management, and protection and pension insurance. Company analysis suggests many of our small business owners are middle class and emerging affluent customers, and a notable proportion of our wealth customers are small business owners. With the rapidly changing operating environment, we believe our capital strength and unique business model, combined with our deep financial credit experience and commitment to compliance, will allow us to remain resilient. Before turning over to James to go through the detailed operating and financial performance and second-half guidance, I would like to highlight one final figure. We have continued to make progress in bringing down APR to our borrowers with the second quarter APR for the overall portfolio reaching 24% versus 26.7% a year ago. This reduction has been executed without negatively impacting our net margins. In the medium term, we will seek to lower our APRs but keep our net margin steady by driving down relevant operating, credit insurance, and funding expenses. I will now turn over the call to James John, RCFO. Thank you, Greg. I will now provide a closer look into our second quarter operational and financial results. Before I begin, please let me remind everyone that all numbers are in R&D terms and all comparisons are on a year-over-year basis. And that's why the right is stated. Our second quarter 2021 results are characterized by strong business growth, continued operations improvement, and extended profit margins. Our total income increased by 17.3% to 14.8 billion, while our core business income, excluding investment income, grew by 19.1%. Our net profit increased by 63.2% to 4.7 billion, exceeding our earlier guidance of 3.7 to 3.9 billion. Our net margin reached 31.9% in the second quarter, a 7.5 percentage point improvement from the second quarter of 2020. Work-wise, our continued growth and profitability are four key factors. First, we further optimize the unit economics in our retail credit facilitation business, even as we reduce our all-in costs. Our loan balance APR declines, by 2.7 percentage points to 34% in the second quarter of 2021, from 26.7% in the second quarter of 2020. While our take rate based on those values improved to 9.7% from 9.5%, and our net margin also extended over the same period. This achievement is a result of four initiatives. we continue to increase our number of banking partners and diversify our funding sources, which has allowed us to obtain cheaper funding from partners with better asset quality. Second, the credit insurance premium on our loan portfolio has also been reduced as our insurance partners took the better credit and the cut in quality into consideration to lower their pricing and then adopt a greater portion of the credit risk. Third, the early payoff effect decreased the user conveyance because we have changed the way we charge our customers. Fourth, we achieved significant efficiency gains in our self-marketing as well as our operations. As a result, we are confident that even if we reduce our ATR service into the future, we should be able to maintain the stability in our take rate and net margin in retail credit facilitation. Second, we maintained a strong pace of low volume growth coupled with business mix improvement. On the retail credit side, we grew our new low sales by 11.1% to $152.7 billion during the second quarter of 2021, in line with our previous guidance of $145 to $155 billion. At the same time, we continue to focus on serving small business owners and improving the risk profiles of our borrowers. In the second quarter, excluding our consumer finance subsidiary, 77.6% of new loans facilitated were dispersed to small business owners, up from 72.6% for the same period of 2020. High-quality borrowers, defined as G1 to G3 borrowers by our own internal classification system contributed 63.7% of the new general unsecured loans facilitated in the second quarter compared to 59.4% for the same period of 2020. On the revenue side, our total client assets increased by 12.4% to $431.1 billion as of June 30th, 2021, exceeding our previous guidance target of 12.1% growth for $420 million. Side assets contributions from mass affluent customers who invest more than $300,000 further increased to 18.2% as of June 30, 2021, up from 76.3% as of March 31, 2021. Third, we continue to make progress in executing our plan for a more sustainable risk-hearing belief model. Loans where we did risk accounted for 16% of new loans facilitated in the second quarter, up from 4.4% in the same period of 2020. New loans facilitated with guarantees from T&C accounted for 76.3% of new loans facilitated in the second quarter, down from 89.1% a year ago. While our funding partners bore the risk for 4.8% of new loans facilitated in the second quarter. As of June 30th, 2021, our outstanding balance of loans facilitated with guarantees from third-party credit enhancement partners had decreased to 84.3% from 94.3% a year ago. All of the affirmation operating metrics exclude those of our consumer finance flexibility. At the same time, we continue to sharpen our focus on improving our asset quality. In the second quarter, our C2M3 flow rate for all loans facilitated was 24% versus 25% a year ago. The 30-day past year deficiency rate for all loans facilitated was further improved to 1.9% as of June 30th, 2021, from 2% as of March 31st, 2020. The 90-day past due increasing rate for the total loan facilitated stabilized at a 1.1% as of June 30th, 2021, on par with 1.1% as of March 31st, 2021. All of the affirmation operating metrics exclude those of our consumer finance history and the measuring product, which would represent roughly 1% of the total loan status. Four. we substantially completed the runoff of legacy P2P products in our work management business. During the quarter, current assets from legacy P2P products were reduced to $44 million from $4 billion in the previous quarter, effectively completing our business transformation. Meanwhile, our fixed rate for the segment was 31.8 BPS, increasing by 3.6 EPS from the previous quarter. These improvements were primarily driven by our continued development in standard wealth insurance products, offset by a decrease in deposit products.

Now let's take a closer look into our second quarter financials. During the second quarter, our total income increased by 17.3%