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Lufax Holding Ltd American Depositary Shares, each representing two (2) Ordinary Shares
Q1 2022 Earnings Conference Call
5/26/2022
spk03: Ladies and gentlemen, thank you for sending by and welcome to Lewis's Holding Limited first quarter 2022 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 heads of Board Office and Capital Markets. Please go ahead, sir.
spk07: Thank you, Operator. Hello, everyone, and welcome to our first quarter 2022 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you'll hear from our chairman, Mr. Ji Guangheng, who will start the call with some general updates of our key achievements, then address some focal issues for investors. Our co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development strategies in the quarter. Afterwards, our CFO, Mr. James Chung, will offer a closer look into our financials before we open up the call for questions. In addition, Mr. YS Cho, our co-CEO, and Mr. David Choi, CFO of Puhui, 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. as we will be making forward-looking statements. Please also note that we will discuss non-effort 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 the filings of the SEC. With that, I'm now pleased to turn over the call to Mr. Ji Guangheng, Chairman of LUFAX. Good morning, everyone.
spk06: Thank you all for participating in the 1st quarter of COVID-19 in 2022. In today's meeting, I will introduce you to the main results of the 1st quarter of COVID-19, and share our views on recent market concerns. Due to the impact of the epidemic in Shanghai, my colleagues and I are at home. If you encounter any technical problems during the meeting, please understand.
spk07: Hello, everyone, and thank you for joining our first quarter 2022 earnings conference call. I will start today's call with an update of our key achievements for the quarter and then share our views on those focal issues for investors. Due to the COVID-19 situation in Shanghai, my colleagues and I are dialing in separately from home. Please bear with us should we encounter technical difficulties during the call.
spk06: On the one hand, the main work results
spk07: P achievements.
spk06: Despite COVID-19 resurgence and microeconomic slowdown, we achieved steady growth during the first quarter. 公司一季度收入173億元,同比增長13.5%, The net profit is 5.3 billion yuan, and the growth rate is 6.5%. The revenue of each ADS is 2.31 billion yuan. We completed the first share of $0.34 per ADS after the opening of the loophole in April. We will continue to return shares in many ways.
spk07: During the first quarter, our total income grew by 13.5% year-over-year to RMB $17.3 billion, and net profit increased by 6.5% year-over-year to RMB $5.3 billion. Our basic earnings per ADS for the quarter reached RMB $2.31. In April, we paid a dividend of US $0.34 per ADS for the first time since we went public. We plan to return value to our shareholders in a variety of ways going forward.
spk06: 第二方面,市场关注的问题。 Second, key investor concerns. About 60% are related to the management of the company, and about 30% are related to the management of the company. The following are the problems in the capital market. In general, the market is still more worried about the Chinese stock market. It believes that the continued decline in the price of Chinese stocks has left the basics. Although the recent statement of the management has given the market a certain confidence, many institutions still hold an observant attitude.
spk07: We maintained open dialogues with the market and hosted over 60 investor events during the first quarter. Based on our data, roughly 60% of investor questions were about macro environments and business operations. 30% were about regulatory trends, and the remainder were related to capital market development. In general, investors are concerned about Chinese ADRs. Many think that the panic selling has caused ADRs' valuation to decouple from their fundamentals. Although recent public statements from Chinese regulators have instilled some confidence into the market, most investors are still taking a wait-and-see approach. 目前来看,投资人最为关注的还是当前宏观经济环境下的入空是否还能保持稳健增长。 Presently, investors' key concern rests on our growth prospects in the current microeconomic environment.
spk06: The credit has also slowed down overall and the quality of assets has dropped. The gap has also been minimized. Overall, the impact of the pandemic on the company has been much greater than that of 2020. The financial pressure this year is much greater. The management team has adopted a series of response measures, including increasing the threshold of credit audit, strengthening the cost control, and preparing for the winter.
spk07: In March, China escalated its countermeasures to contain the coronavirus. Shanghai, for example, has experienced lockdowns under the nationwide COVID-0 policy. Impacted by pandemic included economic slowdown. The financial services industry as a whole unavoidably suffered deceleration in growth and deterioration in asset quality. our own business was also impacted. Our analysis indicates that the impact from this year's pandemic is higher than that of 2020. In preparation for the challenge, our management has preemptively implemented a series of initiatives, including tightening our credit policy, enacting prudent cost control measures, shoring up cash flow management, and many more. Greg will elaborate further on those details later.
spk06: In addition, everyone is still paying attention to the 429 reform situation and the risk of withdrawal of AD2. Currently, the company has completed most of the 429 reform ideas. There are also clear plans for the remaining long-term reform ideas. At the financial committee meeting of the State Council on March 16, Vice Prime Minister Liu He proposed a steady promotion and as soon as possible complete the reform work of large platform companies. Many investors have expressed concerns about the April 29th ratification progress and the ADIC listing risk. Having completed the vast majority of our ratification-related initiatives,
spk07: We have also devised detailed action plans for the remaining issues that require prolonged efforts. At the Financial Stability and Development Committee meeting on March 16, the Vice Premier of the State Council, Mr. Liu He, made a call to press the head with the ratification of large platform companies and to finish this task as soon as possible. On April 29, the Political Bureau of the Communist Party of China's Central Committee also stated in a meeting that efforts should be made to advance the ratification of platform companies and to promote the regulated and sound development of the platform economy. Judging from this information and insights, we believe that the regulatory ratification process is at the point of entering its final phase.
spk06: Regarding the retirement of ADR, we noticed that At the time of May 9, 2022, the U.S. Securities and Trade Supervisory Commission has listed the initial identification list based on the foreign company's question and answer bill. There are currently more than 100 Chinese stocks listed. We can see that both China and the United States are monitoring each other. At the recent Boao forum, Vice President Fang Qinghai of the Politburo said that The China Regulatory Commission negotiation team and the U.S. team negotiated very smoothly and have confidence in achieving the agreement in the future. We believe that the risk of the Chinese stock market retreating will be further reduced.
spk07: Regarding the delisting risk, the U.S. Securities and Exchange Commission provisionally identified Bluefax as a commission-identified issuer under the Holding Foreign Company Accountable Act on May 9, 2022. Over 100 Chinese ADRs have been included on the SEC's provisional list. More importantly, we have been delighted by the positive market signals indicating that the PRC and U.S. authorities are moving closer towards an agreement. During the recent 2022 Boao Forum for Asia Annual Conference, Vice Chairman of the China Securities Regulatory Commission, Mr. Fang Xinhai, stated that negotiations between Chinese and American regulators over audit issues involving U.S.-listed Chinese companies have proceeded smoothly so far, and that a cooperation agreement appears to be possible. We are confident that the delisting risk will likely diminish further.
spk06: Third, LUFAC's mid-to-long-term development.
spk07: Despite the short-term challenges caused by COVID-19, what I would like to reiterate here are the four key competitive advantages that we present, namely alignment with policy direction, tremendous market potential, unique business model, and abandoned capital reserves. These advantages have given us confidence that we should be able to navigate through the current economic cycle. Alignment with policy directions. Because small and micro businesses are part of the core engine powering China's economy, they get a thorough and comprehensive policy support and thus enjoy enormous growth potential. At the same time, they often encounter three hurdles when trying to get funding. They characterize those hurdles as three excesses, three deficiencies, and three difficulties. The three excesses refers to the excessively high cost, high pricing, and high risk that small and micro businesses face when they apply for loans. The three deficiencies are the lack of financial statements, credit scores, and collateral when these businesses typically face. The three difficulties represent the difficulties in unification, standardization, and promotion of financial services to small and micro businesses.
spk06: As a result, it is difficult and costly for small macro businesses to borrow from traditional banks.
spk07: As the leading financial services provider for small and macro businesses, we'll continue to align with regulatory directions, remain true to our mission of offering inclusive financing services, and deliver solutions to solve small and macro businesses' financing difficulties. Enormous market opportunities.
spk06: China's small and medium-sized business financial services market has the characteristics of fast development and low comparison. According to the central bank statistics, from 2019 to 2021, China's total small and medium-sized bank loan balance has reached 29% and the industry is in a fast-growing stage. At the same time, the balance balance accounts for only 10% of the total balance of financial institutions, which is relatively low. and 30% of small and medium-sized banks in developed countries. Therefore, we believe that the market for small and medium-sized enterprises is very promising. With this kind of market support, it will continue to grow rapidly.
spk07: Domestic financial services targeting small and micro businesses can be characterized as high growth and low penetration. According to statistics from the People's Bank of China, The balance of inclusive loans to small micro-businesses grew at 29% Pega from 2019 to 2021, and it constituted roughly 10% of total loans. Although the industry is growing rapidly, it still has a long way to go to catch up with its peers in developed countries, where 30% of total loans are lent to small micro-businesses. Such a gap presents an enticing opportunity for the industry to develop under a variety of supportive policies.
spk05: Unique business model.
spk06: The management department of the company has a comprehensive background in the financial and technology industries. Thanks to its rich management experience and international vision, it is capable of continuously breaking through. We believe that different unique business models will continue to play an active role in the current market environment, helping us to pass through external environment fluctuations more smoothly.
spk07: Over the past 18 years, we have been providing integrated online to offline financing services to satisfy small and macro businesses' needs. Our technology combined with our online operational experience have equipped us with an effective mechanism to reach borrowers and manage risks. Led by a team of seasoned executives with extensive expertise in technology and finance, rich experience in operational management, and global vision in corporate development, we have broken down barriers and achieved important breakthroughs. We believe that our unique business model will support and continue to serve as a solid foundation for our steady growth and steer us through market fluctuations. Abandoned capital reserves.
spk06: China has more than 4 billion yuan in cash, and enough capital can help us survive through the economic cycle. On the other hand, it also maintains our ability to continue to recover shares. Although this year's performance may be affected by the epidemic, the management will continue to be not lower than the level of 2021.
spk07: As of March 31, 2022, we had ample capital reserves of roughly RMB $100 billion in net assets and over RMB $40 billion in cash. That's ensuring our smooth navigation through economic cycles and consistent returns to our shareholders. Despite the challenges brought by COVID-19 this year, we will maintain our per ADS dividend amount at the same or above level than that in 2021.
spk06: Although this year's macroeconomic environment faces challenges, the company relies on the advantages of policy, market, model, capital, and all four aspects. It will definitely be able to pass through the current cycle with small and medium-sized enterprises and continue to develop healthily. The company will continue to respond to national policies, serve small and medium-sized enterprises, and assist in the development of the physical economy.
spk07: In summary, despite this year's challenging macro environment, our advantages in regulatory compliance, market potential, business models, and capital reserves have positioned us well to navigate through the current economic cycle while executing our mission of serving small macro business owners. Going forward, we'll remain fully in sync with China's national policy directive of supporting the growth and development of small macro businesses and the real economy at large. With that, I will turn the call over to Greg, who will share our business updates in detail.
spk08: Thank you, Chairman G. In the first quarter, we built on the solid foundations of 2021 to deliver stable operational results in an increasingly challenging environment. cognizant of the negative impact brought by COVID's resurgence, we have recently launched critical actions for the more difficult market conditions ahead. Before turning to our COVID response, let me highlight a few key figures for the first quarter. Please note that all numbers are in RMB terms unless otherwise stated. In the first quarter, we generated $17.3 billion of total income and $5.3 billion of net profit, both figures exceeding our prior guidance. The take rate in our retail credit presentation business remained steady at 9.7% this quarter versus 10% a year ago. By the end of the first quarter, the wealth management business saw stable client assets of $433 billion despite volatile markets, and the revenue take rate in this business reached 53.9 basis points in March. Operational costs were held steady while we continued with technology investment to empower our direct sales productivity in the loan facilitation and to optimize online customer management and wealth. In the first quarter, about 40% of our new direct sales hires for lending facilitation met our upgraded target profile for the ongoing channel transformation. First quarter direct sales productivity for lending increased 4.8% versus a year ago. Now turning to the resurgence of COVID, we believe the multi-city lockdowns that started in March will likely have a deeper impact on the economy and our operations than seen prior in 2020. Our 18 years of credit experience has taught us that rapid changes in the environment requires decisive, preemptive steps to both minimize downside risks and to be best positioned for growth when the environment recovers. Under the current zero COVID policy, we believe that simultaneous rolling lockdowns across multiple cities will likely remain rooted in the landscape for most of the remainder of 2022. We entered this landscape facing a weaker macro economy than in 2020. The two-month-plus long lockdown of Shanghai, its inter-regional, inter-provincial highways, its supply chains is creating much larger ripple effects than those seen in Wuhan during 2020. Through the lens of our data and experience, we can now roughly profile the impact of Shanghai's lockdown on our lending facilitation business. We forecast that CETA entry flow rates will triple during the lockdown period, gradually returning to pre-lockdown levels six months after the lockdown ends. However, as zero COVID policies and restrictions are constantly evolving, it's difficult to predict their impact on other cities. Furthermore, we think it's only prudent to assume that during the second half of the year, more cities could be placed under the varying degrees of lockdown. From our vantage point, we are unable to estimate the exact number of cities that could be affected, and thus the overall impact is extremely difficult to assess at this point. While there remain uncertainties ahead, we are nonetheless confident that the array of measures we have implemented nationwide will mitigate the challenges posed by this operating environment. These measures include targeting higher quality customers, providing more customized products, and improving our risk management efficiency. First, we are continuing to target higher quality customers and tightening our credit policy by utilizing a differentiated approach. On the one hand, we are gradually ceasing serving high-risk profile customers. For non-small business owners or industries that are likely to be hardest hit by COVID, for example, travel-related, we have tightened our credit policies nationwide. On the other hand, we've adopted a differentiated approach based on risk performance. For geographies and channels with stronger credit performance entering this landscape, we've made smaller adjustments. For geographies with below C to M3 flow rates, we only target new businesses and loan top-ups for the highest quality customer segments. we are providing a greater number of customized products to mitigate any potential sales losses created by our adoption of higher quality standards. For those customers who represent too high a credit risk for us to provide unsecured loans, we encourage them to pledge collateral and apply for secured loans. For those small business owners who have higher quality risk profiles, we provide them with lower APRs, longer tender period products, and more flexible payment schedules to relieve their financial burden and to help them overcome their current difficulties. Finally, we are improving our risk management efficiency. Our collections team are equipped with our risk management system, remote working platforms, technology tools, and the deep experience they gained in 2020 to their work. By leveraging these tools and abilities, they can work remotely to monitor the status of borrowers, proactively identify potential loans at risk, and take immediate action on loan collections. Our proprietary data-driven collection force of 10,000 agents is deployed across 10 cities. This team, together with our more than 57,000 direct sales agents, is fully deployed to help manage and mitigate any and all risks. It's also important to note, as Chairman Xi just did now, that our strong balance sheet and cash position provide us with resilient ability to overcome challenges. As of the end of the first quarter, our net assets stood at $98.3 billion, and our leverage ratio for our guarantee companies stood at less than two times, positioning us well to handle risk fluctuations. Our credit insurance partners are also in a strong capital position to handle associated risks, although they will certainly reprice credit insurance fees as we move through the cycle. The financial strength of the underlying credit enhancement and risk sharing that we have with our funding partners provides them with little burden in the ongoing loan servicing small business owners. We believe this notable strength will enable stable funding availability through this challenging time and further distinguish LUFAX versus other platforms who may now charge higher prices, encounter higher risks, and have less capital resources to protect operational resilience. Being in a relatively strong position with strong partners will enable faster resumption of growth when the macro environment stabilizes. While we are selectively putting on the brakes on new loan growth to be prudent near term, we also remain focused on executing our longer term strategic priorities. The channel transformation has continued at pace in the first quarter with our direct sales making up 57% of new sales in the first quarter versus 49% a year ago, underpinning the improved productivity Also within the direct sales team, we recruited more high-quality talent and dismissed below average performing one. As a result, high-quality talent accounted for 40% of new hires in the first quarter, and we believe this proportion will continue to grow. More broadly, we sense the regulatory environment is placing increased focus on funding availability for small business sector, indicating likely greater stability in regulatory requirements this year versus the past year. Taking all these points together does lead us to revise guidance for the first half of 2022. We will provide full year guidance when we get more clarity. Our renewed guidance in this very dynamic environment is based on the principle that it is better to be conservative early rather than sorry later. Hence, we are revising our new load sales growth for the first half of 2022 to decrease between 7% and 10%. For our wealth management business forecast, we remain largely unchanged and will continue to monitor domestic capital performance, which impacts investor CA and overall investment sentiment. We expect our first half revenue growth to be 8% to 10% year on year. We believe the impact of the lockdown on multiple cities, the volatility we see in foreign exchange rates, and our increase in credit losses where we bear risk will be higher than previous guidance. Thus, our net profit for the first half is likely to decrease between 11% and 13% year on year. If non-cash flow and exchange losses were excluded from calculation of net profit, then the company's expectation for the first half profit will be a decrease of 3% to 4%. As Chairman Key just said, we are confident that we will successfully navigate through the current cycle and are committed to maintaining our 2022 per ADS dividend about at or above the level in 2021. Last but not least, our CFO James has decided to take an early retirement. James has been with the company for eight years and we really want to thank him for his great contribution to the company. The company has started to search for a new CFO And during the interim period, Mr. David Choi will assume the finance function of the company. With that, I'll turn the call over to James Jung, our CFO, to go over the financial details. James. Thank you, Greg.
spk06: I will now provide a closer look into our first quarter results. Please note that all numbers are in R&D terms and all comparisons are on a year-over-year basis unless otherwise stated. We achieved solid financial results in the first quarter as we continue to drive growth in both the top line and the bottom line. During the quarter, our total income was $17.3 billion, up 13.5% year-over-year, and our net profit increased by 6.5% to $5.3 billion year-over-year. Let's have a closer look at our operating numbers. we maintained a stable unit economics for our retail credit facilitation business while further reducing our APR. Our loan balance APR was 21.8% in the first quarter of 2022, a three percentage point decline from 24.8% in the first quarter of 2021. In comparison, our loan balance take rate was 9.7% in the first quarter of 2022 only a 0.3 percentage point decline from 10% in the first quarter of 2021. Our continued efforts to diversify funding sources, engage with more banking partners, reduce credit insurance premiums on our loan portfolio, and improve customer charging mechanisms to diminish the impact from the early loan repayments enabled us to maintain stable unit economics to drive further enhancements for our sales and operating efficiency despite APR declines. Second, we continue to penetrate our core and targeted customer segments. On the retail credit side, we continue to focus on serving small business owners. During the first quarter, excluding our customer finance subsidiary, 83.5% of new loans facilitated were dispersed to small business owners, up from 75.7% in the same period of 2021. On the wealth management side, despite the negative impact of P2P and online deposit products runoff, we managed to grow our total client assets by 2.7% to $432.6 billion as of March 31, 2022. Client asset contribution from mass-effort customers investing more than $300,000 increased to 81.3% as of March 31, 2022, up from 76.3% as of March 31, 2021. Third, we continue to drive forth the evolutions of our risk-sharing business while maintaining vigilance on asset quality changes. In line with prevailing regulatory requirements, we bore credit risks for 20.4% of the new loans we facilitated in the first quarter of 2022, up from 12.5% in the first quarter last year. All of the affirmation operating metrics exclude those of our consumer finance subsidiary. Due to the slowdown of macroeconomic growth and the COVID-19 pandemic, we saw some deteriorations of overall asset quality. However, thanks to our risk management system, the negative impact on our risk indicators are limited. Excluding consumer finance subsidiary, our DPD 30 plus and DPD 90 plus delinquency rates were 2.6% and 1.4% for the total loans we facilitated as of March 31st, 2022, compared to 2.2% and 1.2% as of December 31st, 2021. We will remain vigilant and be prudent on our borrow acquisition and risk management strategy. Now let's take a closer look at our first quarter financial numbers. At the highest level, our total income in the first quarter grew by $2.1 billion. or 13.5% year-over-year growth, while the total expense increased by $1.6 billion or 19.1% year-over-year growth. The net income grew by 6.5% year-over-year to reach $5.3 billion. If no cash foreign exchange losses were excluded from the calculations of the net profit, then the year-over-year net profit change would be 2.1%. While operating related costs continue to remain flat due to efficiencies, total expense increase is primarily driven by credit impairment costs due to higher risk taking and increased risk and impairment provision rate related to loans. Next, let's go through the financial numbers line by line. As the total income mix of our retail credit facilitation business continue to change, Thanks to the evolution of our business and the risk-sharing model, total income increased by $2.1 billion, or 13.5% year-over-year. During the quarter, while platform service fees decreased by 9.7% to $9.3 billion, our net interest income grew 71.2% to $5 billion, and our guaranteed income grew by 245% to $1.9 billion. Other income decreased to $704 million in the first quarter from $1 billion in the same period of last year. As a result, our retail credit presentation platform service fees as a percentage of total income decreased to 50.2% from 63.4% because consolidated trust plans provide lower funding costs. We continue to utilize them in our funding operations, enabling our net interest income as a percentage of total income to increase to 28.8% from 19.1% a year ago. Moreover, as we continue to get more credit risk, we generated more guaranteed income reaching 11% of total income compared to 3.6% a year ago. Our investment income decreased by 11.2% to 435 million in the first quarter from $490 million in the same period of last year, mainly due to the decrease of investment assets, partially as a result of share buyback. In terms of wealth management, our platform transactions and service fees decreased by 5.3% to $592 million in the first quarter, from $625 million in the same period of 2021. This decrease was mainly driven by the runoff of legacy products. which was partially offset by the increase in fees generated from our current products and services. Turning to our expenses. In the first quarter, our total expenses grew by $1.6 billion or 19.1% to $10.2 billion from $8.5 billion in the same period of 2021, primarily driven by the increase of credit impairment costs. Total expenses Excluding credit and asset impairment losses, finance costs and other losses increased by 2.7% to $7.2 billion in the first quarter of 2022 from $7.1 billion in the same period of 2021. Remain almost the same as we further improved operating efficiency. Our total sales and marketing expenses which include expenses for borrowers and investor acquisition as well as general sales and marketing expenses increased by 5.9% to $4.5 billion in the first quarter. Our general and administrative expenses decreased by 15% to $726 million in the first quarter from $854 million in the same period of 2021. This decrease was mainly due to our expense control measures. Our operation and servicing expenses increased by 4.5% to $1.6 billion in the first quarter from $1.5 billion a year ago, primarily due to the increase of trust plan management expenses, which resulted from the increase in consolidated trust plans. Our technology and analytics expense increased by 0.2% to $448 million in the first quarter of 2022, from $447 million in the same period of 2021, mainly due to the company's ongoing investments in technology research and the development. Our credit impairment losses increased by 168.2% to $2.8 billion in the first quarter from $1.1 billion a year ago. This was mainly driven by two factors. One, increase of provision and indemnity loss given by increased risk exposure. As a reference, including the consumer finance subsidiary, the company bore risk on 19.4% of its outstanding balance from 8.7% as of March 31st, 2021. Two, change in credit performance due to the impact of COVID-19 outbreak. Our finance costs decreased by 25.7% to $211 million in the first quarter from $284 million a year ago, mainly due to the increase in interest income resulting from the increase in deposits. Additionally, our effective tax rate was 26% during the first quarter of 2022, remained the same as the same period of 2021. Other gains were 118 million in the first quarter of 2022 compared to other losses of 138 million in the same period of 2021, mainly due to the foreign exchange gains in the first quarter of 2022. We have noticed that the volatility of foreign exchange rates between renminbi and the U.S. dollars has increased, and such volatility could have both positive and a negative impact on our quarterly netting profit in the future. As a consequence of affirmation factors, our net income increased by 6.5% to $5.3 billion during the first quarter, from $5 billion in the same quarter of 2021. Meanwhile, our basic and diluted earnings per ADS during the first quarter were RMB 2.31 and RMB 2.14, respectively. As of March 31st, 2022, We had a cash balance of 40.6 billion in cash at a bank as compared to 34.7 billion as of December 31st, 2021. In addition, liquid assets maturing in 90 days or less amount to 52.1 billion as of March 31st, 2022. During the first quarter of 2022, the overall economics in China was impacted by the regional lockdown. and the current zero COVID policy, we believe that rolling lockdowns simultaneously across multiple cities will likely remain rooted in the landscape throughout most of 2022, thus exerting severe, mainly, inferences towards the entire economy and the credit business. As the overall impact is extremely difficult to assess, we would like to provide our revised first half guidance to account for the near-term macro headwind and it will provide four-year guidance when we get more clarity. For the first half of 2022, as we become more prudent in underwriting, we expect new loans facilitated to decrease between 7% to 10% year over year to the range of $294 billion to $301 billion. Client assets to grow by 1% to 3% year over year to the range of $425 billion to $434 billion. Total income to grow by 8 to 10% year over year to the range of $32.5 billion to $33.1 billion. Credit related provision will increase given the deterioration of asset quality driven by the COVID impact and higher risk exposure. Other losses will increase due to foreign exchange volatility. operation related costs will decrease as we continue to improve our efficiency. As a result, we expect the net profit to decrease between 11 to 13% year over year to the range of 8.5 billion to 8.6 billion. If non-cash foreign exchange losses were excluded from the calculation of the profit, then the company's expectation would be for a decrease in the net profit for the first half of 2022. of between 3 to 4 percent. The profit growth rate will pick up once the channel optimization impact starts to come through and the credit costs are normalized on an annual basis. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. That concludes our prepared remarks for today. Operator, we are now ready to take questions.
spk03: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on the telephone keypad now. If you change your mind, please press star followed by 2. When preparing to ask a question, please ensure your phone is muted locally and please mention the question in both English and Chinese. Thank you. Our first question comes from Winnie Wu from Bank of America. Please go ahead.
spk01: Thank you very much for giving me the opportunity to ask a question. So my question is regarding the COVID lockdown. I mean, apparently management is being very prudent in terms adjusting the growth target and lifting the lending standard. But just want to ask, is the impact on loan demand temporary or could this lockdown leading to more prolonged damage to the demand from the SME sector that the growth outlook for even 2023, 2024 might be impaired? And related to that, the second question is in terms of the impact on asset quality and impairment, you know, assuming the COVID situation can get under control by, you know, say, end of June, when do you think is the peak in terms of, you know, MPL formation, MPL ratio, and our impairment? I will do the translation. Thank you very much for giving me the opportunity to ask this question. The current epidemic and the impact of the lockdown have indeed had a great impact on all industries. We are also very happy to see that Lu Jinsuo is very active in making some adjustment to the business structure and more carefully doing the business layout. I would like to ask two related questions. The first one is that This pandemic has affected small and medium-sized enterprises' loan needs and growth. Do you think it's a temporary situation? Let's say the lockdown ends at the end of June. Then we can see that the business will return to, say, 2020 or 2019. Or do you think that with this three-year long-term epidemic lockdown, it will have a structural impact on small and medium-sized enterprises, which will affect the demand for loans, and even affect the long-term loan increase in 2023 to 2024? This is a prediction about the demand and loan increase. The second is about asset quality. Taiwan Taiwan Taiwan This question is for the chairman of the board of directors, YS, to answer.
spk06: How, thanks Jidong and then Winnie. This time COVID impact is quite different from 2020. This time it takes a lot wider and longer. In 2020, the impact was quite limited to certain area and therefore relatively short period of time. Our credit indicators also freely covered back to pre-pandemic level only in three months' time in 2020. And the overall economy was in a better shape back then, like no supply chain issue, no import-export issue, not a big issue in real estate sector, for example. So I think we all believe, we all agree that even after this pandemic control comes to an end, the market environment will not be as good as pre-pandemic period at this time. So with the concern on economic downturn, which was shown from many indicators from second half last year, we started taking preemptive actions from fourth quarter last year. And that, as a whole, cut off more than 20% of our target segment and made the biggest impact on our last channel neuron sales. It dropped almost 40% from the same period last year as a result. But looking back, we believe we made a right decision. And it is not the right time, we think, to pursue rapid growth. Instead, we'll be more prudent in new customer quality and our estate quality. There are still quite much uncertainties to how this pandemic control play out and its following impact. That's why we only provide the first half guidance. Nonetheless, you know that we have more than 15 years in consumer credit risk management. And we have more than, as Greg said, we have more than 10,000 creditors nationwide who have remote working experience during lockdown situation with the best in market system support. Also, we can't have 57,000 offline directives engaged in offline collection and support our collection team. And the demand side, although recently demand on this operation loan is weakening, that's true, but we do not worry about demand side because we know that the market space issues and then we merely take about 1% market share and in the long run, we know that this sector will surely go in line with the government support and policy. And then, good news is, you asked about when will the peak of our credit loss, or the frequency ratio, or net flow, and then when it will recover, and then how long it will take. Still uncertain, but the good news is, the peak time is already over. April was, we saw the highest net flow ratio, in terms of C2M3, and then it makes a clear progress, clear improvement starting from May. So I believe, so now we are in the process of recovering already, including Shanghai.
spk05: Thank you. Our next question comes from Thomas Chong from Jefferies. Please go ahead. Hi, good morning.
spk04: Thanks, management, for taking my question. I very quickly ask a question with regard to our wealth management strategies as well as how the consumer sentiment impacts the business trend. Thank you.
spk05: Hi, Kyle. Thank you. Sorry.
spk08: Okay. On the wealth management side, we really continue to do three things. So one is continue to deepen our focus on the affluent and upper affluent customers and providing them with more content and service around the new product set, which is now that all products in China have moved away from fixed income into NAB-based mutual funds, private placement funds that have more volatility than fixed income, providing with more content, more upfront information, more post-investment services, and really combining our relative expertise through online as well as through telecom services where needed for these higher-end customers to really help them navigate this new environment. Even though the markets have been in the A market, the A share market in China has been down 20% to 30% really through May now, we've seen quite good stability in the customer base and quite good stability in the CA overall. So we will continue to provide those services, continue to refine them, give customers more real-time input on their portfolios, helping them drive diversification help improve their overall customer mix so they can generate a steady return in a difficult environment. We do have hope that now that the markets have come off quite a bit in the first half that we may have a chance for some recovery for customers in the second half, which would be very helpful as we continue to change this product mix to this target segment. The other thing that we are doing as well is increasing our focus. This is something we've been working on for more than a year now, on the insurance product set as well. Certainly, as China goes through its overall changes, given our average customer age is about 39 years old on the wealth side, pension-related issues where pension reform is advancing, insurance and pension services are becoming increasingly important. And that's an interesting area because it is a nice margin business to have. So overall, we continue to drive it online. We continue to drive online. New customer growth, we continue to focus on the upper end and change the product mix to continue to drive up the overall net margin of the business. If you look, as we stated, at the end of March, we're at about 53, 54 basis points income over CA, which is up quite a bit from a year ago. So this is an area that we continue to drive, and over the longer term, we hope it will become a larger contribution to the holdings as a whole.
spk03: Thank you. Our next question comes from Hans Van from CRSA. Please mention your questions in both English and Chinese.
spk02: Sure. Thanks. Thank you for giving me this opportunity to ask questions. My question is mainly about the direct sales reform progress. As we know that since end of last year, Lusax has launched the the progress to reform the direct sales team. Just wondering what's the progress now and how long should we expect this reform to be largely completed? And also just to follow up a question regarding the breakdown of the customer acquisition, can you share the percentage in terms of coming from the direct sales team, coming from the insurance team of Ping An and also from the telephone sales? Thank you for giving me the opportunity to ask a question. I would like to ask about the progress of our direct sales team. We know that at the end of last year, our company began to optimize the team. So I would like to ask you to share with us the current progress. When can this progress be said to be a general completion? And then I would like to ask about the proportion of the customer channels according to the direct sales team, the sales team, and our e-commerce. Thank you.
spk06: Thanks Hans. Let me first share the products with live channel actions. Live channel, the first quarter neuron sales dropped by almost 40% from the central last year, and now it takes about 20% to our neuron sales contribution. And direct sales, The first quarter union sales increased by about roughly about 10% from the same period last year, and it now takes 57%. So regarding the channel mix, life is contributing 20%, and then direct sales almost 60% now. And the rest 20% are from telemarketing, especially for our EVDC customers reborrowing. So it is a mix. Before I get into the DS channel reform, if I show someone about Life Channel, you know that we took a series of risk mitigation actions from fourth quarter 2020. So 40% face drop in first quarter this year is big, but it's not a huge surprise for us if intended. now if you look at the live channel new customer quality in first quarter 2020 after we took all those actions uh we measure we measure a new customer quality by like a dpd one plus at mob3 or dpd 30 plus at mob3 uh it is now even slightly better than that of that access channel it's very promising and total number of life agents now you see that it's gets stabilized. It does not decrease further and much. So we believe live channel contribution to neuron phase, which is already reaching the bottom, it cannot be lower than this. And we believe this will rebound slowly going forward. So this is update about live channel action. And then I want to say that we have a hope that this will contribute more new sales going forward. And then coming to direct sales reform, this is ongoing reform. It takes time. As of March end, total number of direct sales we have is 57,000. That includes team leaders and other supporting staffs. It was 57,000, exactly the same number, in a year ago. Number of direct sales didn't increase at all for a year, yet DS channel sales volume increased by almost 10%. That well indicates our DS channel productivity continuously improves. Although we continuously tighten underwriting policy and reduce target market to achieve better asset quality. We continue to focus on optimizing the sales team mix with priority. This year, we said we do not pursue rapid sales growth or balance growth, but taking this opportunity, we focus more on how we can optimize our sales team mix. We try to get more, we call it Yo Chai, whose retention rate is two times higher than, say, Yo Chai at MOB 12, meaning after one year they join us. And the host productivity is normally more than 20% higher than fair Yo Chai. So we focus on how we can get more Yo Chai group versus fair Yo Chai and then change the mix of our direct phase. As Greg mentioned, the recent hiring shows that our Yo Chai portion, it takes up to more than 40% out of total new hire. It was just one visit last year. So we are making progress. And also, we are providing a lot more tech enablements through our sales app upgrade to enhance their sales efficiency and also we are now trying to gradually removing team leader layer which takes about 10 percent of total sales headcount so then naturally we further improve our sales productivity so this year we focus on building stronger direct sales team through DH reform and then this will lay a foundation solid foundation for our rapid growth from probably next year after we get through this difficult time.
spk05: Thank you. And I'll hand over to the management team for closing remarks. Thank you, everyone, for joining the conference call.
spk07: If you have more questions, please do not hesitate to contact the company's team offline. Thanks again. Bye-bye.
spk03: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your line.
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