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

Ladies and gentlemen, thank you for standing by and welcome to the LUFX Holding Limited second quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we'll 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, Ms. Liu Xianyan, the company's head of board office and capital markets. Please go ahead, ma'am.

Thank you very much. Hello, everyone, and welcome to our second quarter 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 and CEO, Mr. Y.S. Cho, who will provide an update of our latest business strategies, the macroeconomic trend, and the recent developments of our business. Our co-CEO, Mr. Greg Gibb, will then go through our second quarter results and provide more details on our business priorities. Afterwards, our CFO, Mr. David Choi, will offer a closer look into our financials before we open up the call for questions. 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. With that, I am now pleased to turn over the call to Mr. Y.S. Cho, Chairman and the CEO of Luvex. Please.

Thank you for joining today's call. During a complicated macro environment that has been particularly challenging for small businesses, we have doubled down on our efforts to optimize costs and adjust our strategy to achieve our U-shaped recovery. While we continue to make progress towards this recovery, we have also been embracing new initiatives to achieve long-term stability. In the second quarter, we were able to improve our bottom line sequentially and advance our efforts to obtain higher quality neurons we enabled. We also drew closer to our goal of transitioning into a 100% guarantee model and continued our strategies to mitigate risk and diversified business. Let me provide some updates for the second quarter. First, China's macroeconomy is still charting its path to recovery, and landscape remains complex. In the second quarter, China's GDP demonstrated a year-over-year growth of 6.3%, indicating progress towards the country's annual growth target of 5%. However, the performance of producer price index and consumer price index, as well as some other economic indicators, such as import-export statistics, signal a complicated situation. We'll continue to closely monitor market dynamics as we navigate China's evolving macroeconomic environment. Meanwhile, SBOs remain under pressure and continue to face difficulties in the current environment. The SME Business Conditions Index, published by the Chung Kong Graduate School of Business, which considers factors including sales outlook, profit outlook, and the finance environment, declined from 58.9 in March to 50.2 in June. The Small and Medium Enterprises Development Index, and macroeconomic perception sub-index, which reflects enterprise confidence published by the China Association of Small and Medium Enterprises, were also below the critical threshold of 100 in the second quarter. This indicates that operational environment for SBOs remained challenging in the second quarter, and it may take more time for the SBO segment to recover. On the regulatory front, the overall regulatory environment remained stable. Government authorities have indicated that their priority is to employ policies that will be favorable to economic growth and the private sector. This will hopefully provide a stronger foundation for private enterprises and platform economy. Next, let's get into the impact of these factors on our business. Because of changing macroeconomic environment for the SBO segments, our U-shaped recovery has been progressing slower than we had anticipated. Neuron sales in the second quarter declined sequentially due to weakened high quality loan demand from SBOs, as well as our continued emphasis on operational prudence. As we have discussed over the past several quarters, our goal is to prioritize asset quality over quantity, with the goal to improve our overall asset quality for long-term, healthy, and sustainable growth. We continue to see progress on this front. Our C2M3 ratio stabilized in the second quarter, though it remained elevated from historical levels, partially due to decreased outstanding balance. we are pleased to observe that asset quality of neurons is in line with our expectations. Early risk indicators suggest that asset quality of neurons enabled after we tightened credit standards is better than that of the vintages enabled during the past three years, although it has not yet fully recovered to the pre-COVID levels seen in 2019. Meanwhile, our consumer finance business continues to witness healthy growth. Consumer finance loans as a percentage of total new loan sales increased during the second quarter and comprised over a third of new loans enabled during this period. Total outstanding balance of consumer finance loans was up as well. In addition, the NPL of our consumer finance business decreased from 2.4% in the first quarter to 2.2% in the second quarter. In light of challenging macroeconomic environment encountered by the SBO segments and the relatively long period of time it may take for this segment to recover, we expect our consumer finance business will become an increasingly important part of our portfolio over the next 12 to 18 months. On the financial side, Our revenue decreased in tandem with our outstanding balance. In response to this anticipated top-line pressure, we maintained our discipline with regard to expenses. Continuous optimization efforts enabled us to shrink our operating costs at a greater rate than the decrease in income. Together with a stabilized asset quality, our bottom line improved over the last quarter. The events of the past several quarters have highlighted the importance of mitigating risk in regards to the long-term health of our business. As such, risk minimization and business diversification will be the key component of our medium-term strategic initiatives. Recognizing this, we have devised a multi-layered approach, which we expect will help us achieve long-term stability. This approach involves maximizing the utility of our guarantee and consumer finance licenses, continuing our operational shift towards high-performing regions, maintaining strength in direct sales channels, and further enhancing our risk control mechanisms. We intend to make full use of our guarantee license to focus on growth. in better performing economically resilient regions. We continue to transition towards the business model under which our guaranteed subsidiary will provide 100% of credit enhancement. This approach will allow us to more completely utilize the benefits of our guaranteed license and leverage our strong capital position and result in a better profitability in mid-term. Currently, our insurance company credit enhancement partners are charging elevated insurance premiums, which puts pressure on our take rates. Switching to the 100% Guarantee Model will resolve this and will improve our take rate and profitability. In addition, 100% Guarantee Model without CJI partner is simpler. This means easier compliance with the regulation and a better process for borrowers. We have discussed our transition towards this 100% Guarantee Model before, and now I'm pleased to report that we continued to make good progress. At present, we have already secured a sufficient credit line from our funding partners to be able to support this model for 2023 and beyond. During the second half of this year, we plan to continue to increase the proportion of the loans enabled under this model. As a result, we expect our risk-bearing percentage will further increase in the coming quarters. Our ability to do this is based in part on the strength of our capital position. At the end of the second quarter, the leverage ratio of our guaranteed subsidiary was 1.6 times as compared to maximum regulatory limit of 10 times. In addition to transitioning towards the 100% guaranteed model, we also plan to further expand our consumer finance business. This decision is motivated by a number of factors. First, under the current macroeconomic environment, Consumer finance loans with smaller ticket sizes and shorter durations complement our SBO loan enablement business, which is more heavily impacted by the macro conditions. By providing consumer consumption loans, we can provide a more comprehensive product line to our customers to satisfy their consumption needs. Expanding our consumer finance business also opens up opportunities for synergy with our Puhui loan platform by leveraging our risk control capabilities and existing customer base. Furthermore, our consumer finance license allows us to operate the consumer finance business in full compliance with the regulations. With this money lending license, we are able to provide customer loans directly to our customers on the simple and straightforward business model. which improves customer experience. As we undertake these efforts, we intend to continue our strategy of focusing on strong regions, enhancing direct sales channel productivity, and bolstering risk control mechanisms in our operations. We have focused and will continue to focus on establishing scaled operations in more economically resilient regions. We have previously seen better credit performance from customers in these regions. In the second quarter of 2023, 74% of our direct sales were deployed in top third and mid third regions, up from 71% during the same period a year ago. Meanwhile, we also concentrate on boosting the productivity of our direct sales channel. Average productivity for direct sales team increased by 10% sequentially in the second quarter. Risk control will also take the form of more stringent vetting process. We'll continue to prioritize quality over quantity and only accept borrowers that meet our tightened credit standards. This will keep us on track to improve overall loan quality in the long term. At the same time, we'll continue to improve our risk control model We have developed a new AI plus expert model, which integrates our AI capabilities to meet the extensive data requirements of our dual KYC and KYB approach. By leveraging AI tools, we can conduct follow-up interviews, collect data, and identify potential risk within a short time frame. Our risk assessment experts then leverage the information provided by AI combined with their own personal experience to make well-informed decisions. This model strikes a balance between efficiency and accuracy in risk management. In addition to these enhancements, we have also upgraded our credit loss forecast model, which now considers a wider range of macro factors. As a result of our focus, we expect that our near-term loan growth will remain prudent and somewhat limited. And as we transition to the 100% Guarantee Model, the increase in risk bearing will lead to higher take rate and higher upfront provision. This will suppress our bottom line performance for the near term. However, we are taking long-term perspectives with these decisions. We are confident that our approach will build a foundation from which we can achieve healthy and sustainable future profitability. I will now turn the call over to Greg for more details on our operating results.