Hello, ladies and gentlemen. Thank you for participating in the Second Quarter 2021 Earnings Conference Call for FinVolution Group. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host Jimmy Tan, Head of Investor Relations for the company. Jimmy, please go ahead.

Hello, everyone, and welcome to our second quarter 2021 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company's e-mail alerts by visiting the IR section of our website at ir.finvgroup.com. Mr. Feng Zhang, our Chief Executive Officer, and Mr. Jiayuan Xu, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session. During this call, we will be referring to several non-GAAP financial measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with US GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company's filings with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Finally, we post a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Feng Zhang. Please go ahead, sir.

Thanks, Jimmy. Hello, everyone, and thank you so much for joining us today. We continue to provide value for both users and institutional partners in different aspects. Leveraging our cutting-edge technology, we have been providing value for users across multiple segments such as consumer finance, small business owners and different types of financial institutions. Through our platform, users are able to enjoy the convenience of finance at their fingertips, accessing credit lines in a timely and efficient manner. On the other hand, our institutional partners are able to access and evaluate quality borrowers with efficiency. Along with the value created, we're thrilled to be reporting another set of record-breaking operational and financial results in the second quarter as we harness our technological capabilities effectively to acquire new and better quality borrowers and constantly increase our acquisition channels. Our total number of new borrowers acquired globally once again crossed the 1 million mark to a new record high of 1.18 million, an increase of over 500% year-over-year and 18% quarter-over-quarter. More specifically, number of new borrowers acquired in China reached 812,000, representing an increase of over 380% year-over-year and 31% sequentially. The number of new borrowers acquired in the international markets reached 371,000, approximately 13-fold increase compared to the same quarter last year. Another clear indication that we are resuming high-quality growth is that our total transaction volume for the quarter reached a new record high to RMB 33.4 billion, a 153% jump year-over-year and a sequential increase of 25%. Specifically, transaction volume in China climbed 148% year-over-year and 25% quarter-over-quarter to RMB 32.5 billion, while transaction volume for international markets grew exponentially by 1,780% year-over-year and 23% sequentially to RMB 940 million. Simultaneously, our outstanding loan balance further expanded to RMB 39.4 billion, representing year-over-year growth of 87% and 21%…

With continued improvement across multiple operations metrics in the second quarter, we delivered our non-GAAP operating income of RMB 726 million, an increase of 26% year-over-year and a sequential increase of 8%, further validating the viability of our business model. Our robust balance sheet with RMB 4.9 billion RMB in unrestricted cash and short term investments, coupled with our strong technology capabilities, positions us well to explore opportunities both in domestic and international markets. Now, turning to the financial results for the second quarter. In the interest of time, I will not walk through each item line by line on this call. Please refer to our earnings release for more details. Net revenue increased by 32% to RMB 2.4 billion for the second quarter of 2021 to our RMB 1.8 billion in the same period of 2020, primarily due to increase in transaction volume and partially offset by the decrease in guarantee income as a result of improved asset quality. Loan facilitation services fees increased by 135% to RMB 952 million for the second quarter of 2021 to our RMB 405 million in the same period of 2020 primarily due to the increase in transaction volume, which was partially offset by the decrease in average rate of transaction fee. Post-facilitation service fees increased by 96% to RMB 300 million for the second quarter of 2021 to our RMB 153 million in the same period of 2020, primarily due to the increase in outstanding loans serviced by the company and the low impact of deferred transaction fees. Guarantee income was RMB 666 million for the second quarter of 2021 compared to RMB 821 million in the same period of 2020 as a result of improved asset quality. Net interest income decreased by 7% to RMB 309 million for the second quarter…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Thomas Chong with Jeffries. Please go ahead.

Hi, management. Thanks for taking my question. Congratulations on the strong results. So first, I have two questions here. So first, could you please share some updates about the regulatory environment? And how much of our loans already have an APR below 24%? And how should we think about the trend in APR going forward? And my second question is, what about our outlook on loan origination volume in the second half and 2022? Thank you.

[Foreign Language] Okay. Let me do the translate for Mr. Xu. From our understanding, the cap on IRR 24% is a window guidance from the CBIRC for consumer finance companies. But it is not evenly implemented across the country as there are different timelines for different institutions. For example, some determine that the outstanding loan balance of all loans above 24% will be reduced to zero by the end of next June, whereas, for some, institutions will follow the guidelines that there will be no new originations above 24% by the end of next June. [Foreign Language] This is actually something within our expectation and we have preemptively been reducing interest rate for our borrowers. For example, in the call earlier, our CEO, Mr. Feng Zhang, has mentioned that, in the first quarter, our borrowing rate was 26.2. And in the second quarter, this borrowing rate was reduced to 26.2. I mean, in the first quarter, it was 26.8. And it has been further reduced to 25.4 in August and also the proportion of loans facilitated at or below 24% has reached 60% in August. [Foreign Language] Okay. We have been making the preparations and we believe we are close to shifting our loans to under 24%. And based on the static assumption stress test, we believe the impact will be around 0.5% to 1%. And our take rate will be reduced to around 3.5% from the current level of 4.4% in the second quarter when the cap has been fully implemented. [Foreign Language] And do note that this is based on the static assumption. And we are confident to further improve our funding costs, delinquency rates, and operating efficiency going forwards, and all these will actually help to make an improvement in our take rate going forward. [Foreign Language] We believe there is a grace period involved over here. And based on these assumptions, we are very confident in achieving our full-year guidance that we have given out at the beginning of the year. And we are confident in beating the upper end of the guidance that we have given out, which is RMB 120 billion.

[Operator Instructions]. The next question comes from Alex Ye, UBS. Please go ahead.

Hi, management. Thanks for taking my question. I have a few questions. First one on - also on the margin outlook, the impact from the price. So, after you have implemented a lower price recently in August, so how has that affected your take rate so far? And how is the outlook for the next year? And then, second question is on your sales and marketing trends. So, I saw that it has continued to go up quite substantially and outpace your overall loan growth. I'm wondering can you share more color on what's the driver behind your sales and marketing trend? And when could we sort of start to expect some sort of stabilized trend in terms of the sales and marketing as a percentage of your loan volume? And then third question is about your overseas market strategy. It's always quite encouraging to see further progress on that front and it currently accounts for around 3% of your total loan volume. So, I'm wondering if you could share with us if you have any, like your targeted loan volume contribution from overseas market, like in the next two to three years? Thanks.

[Foreign Language] Okay. This question is related to the earlier question of interest rates being capped at 24%. Our current rate is around 4.4%. And based on the static stress test, we believe our take rate will be reduced by 0.5% to 1% to around 3.5%. And as for the pace of the reduction, we will still need to discuss with our partners in order to determine the right pace for this reduction. [Foreign Language] Okay. Although there are challenges in the take rate in the future, I would also like to update that we have achieved significant progress in our ABS application. And in the future, we believe that ABS will diversify our funding sources. [Foreign Language] Okay. In the second quarter, our customer acquisition cost was around RMB 400. The CPS in China was about RMB 470 in the second quarter versus RMB 450 in the first quarter. And for our CPS for the international market, it was around RMB 230 in the second quarter. [Foreign Language] And in the future, we believe this trend will be stable. In China, we expect our customer acquisition costs to be in the range of RMB 400 to RMB 450. For the international market, it will be around the range of RMB 200-plus. [Foreign Language] Okay. I would also like to update on my different customer acquisition channels. For example, our information feeds channels consist about 60% to 70%. of new customer acquisition. Our app stores add about 15% and our offline customer acquisition team has been making very fast progress and it consists of about 10% of our new customer acquisition today. [Foreign Language] In the second quarter, our loan origination for our international markets was about RMB 940 million. On a quarter-on-quarter growth, it has increased by about 24% and we have also penetrated and began operations in our fourth country, Vietnam. [Foreign Language] There has been some resurge of the COVID-19 in the Southeast Asia recently. And we believe we are still confident we're able to achieve about four times growth compared to last year, which is about RMB 4 billion of loan volume in Southeast Asia market.

This is Feng. I would just add that Southeast Asia market, in terms of total population size is roughly half of Mainland China. But in terms of GDP growth and financial market, it's at an early stage. So, our business is also at a much earlier stage compared to where we are in Mainland China. So, if we look at a three to five years horizon, we definitely expect our growth rates in Southeast Asian markets to be faster than the domestic market. So, it's hard to predict that because it also depends on how much growth we get in the domestic market, which does have uncertainties, given the regulatory environment, but we would certainly hope that, within three to five years, our international business can account for maybe in the range of 20-percent-ish for our total transaction volume.

[Operator Instructions]. And the next question is from Eric Lu with China Renaissance.

Congrats on a great performance in the second quarter. The first question is about overseas explanation. So, we know the company has expanded in four countries in Southeast Asia. So, can you please provide more color about the [indiscernible] model in each country. For example, the funding source, the asset quality and the product nature. And the second question is for the capitalized loan facilitation model. So, can you please provide some color about the future plan of adopting capital-light business model?

[Foreign Language] The unit economics for our international business is actually very different from our business in China in terms of pricing, in terms of risk performance. And we can give – for the international market, the take rate is around 10% to 12%. [Foreign Language] We have actually achieved the breakeven point for our international business. But at the moment, our priority is not in turning a profit, but instead our focus is on acquiring more customers to have a faster growth. [Foreign Language] Our CEO has actually mentioned that we have made significant progress in our capital light progress from 2.3% in the previous quarter to 13% in this quarter and contribute about RMB 4.3 billion. [Foreign Language] And for the quarter, we have worked with eight different institutions under the capital light model. And in our potential pipelines, we have another six more institutional partners willing to work with us on the capital light model. [Foreign Language] If you compare the capital light model to the capital heavy model, there's a 1% additional cost involved. [Foreign Language] And for the rest of the year, our focus on the capital light model is actually on the quality of the cooperation model of the capital light model, meaning that we will continue to work with more partners on this model. And as you know, our leverage ratio is also relatively low at only 3.8 times.

The next question is from Hans Fan with CLSA.

I have two questions. One is on regulation and the other one is on asset quality. So, about regulation wise, I think some other callers asked about APR. I want to ask about the loan facilitation in terms of breaking up the link between the fintech platform and the bank [indiscernible]. So, there was a regulation ask the fintech platforms to pass data through the licensed credit scoring companies first, who can in turn pass data to banks? So, based on this regulation, how do we plan to be compliant? And what are the impacts on our business, especially on the take rates? And what are the potential sort of change in in the model? That's number one. Number two is on asset quality. We noticed that our asset quality trends was very good. So, just wondering, looking at the most recent two months, what are the trends there? Do we expecting continuous improvements in delinquency ratios?

[Foreign Language] The regulator's view on data collection is actually based on minimum required standard. [Foreign Language] And our company has been working along in this direction. And based on the past reviews, we believe we have fulfilled the requirements. Our app has actually received the app security certification and app information security certification from the China National Computer Virus Emergency Response Center. [Foreign Language] I would also like to stress that our core capability is actually based on the data utilization and not based on the amount of data collected and passed. The regulation's direction of the minimum required standard will not actually affect us a lot. [Foreign Language] And based on our understanding on breaking up the link, all credit-related activities need to be supervised under licensed regulatory bodies. This means that such activities needs to go to a licensed institutions and credit bureau agency is actually one of the channels. [Foreign Language] And going forward, we will strengthen our cooperation with the credit bureau agency. And we have been working with Baihang since 2018. And we have been developing products together with their teams. [Foreign Language] As mentioned earlier, all credit-related activities needs to be supervised under licensed regulatory bodies. And we're also exploring the possibilities of using our current licenses, such as our micro lending license and financial guarantee license to process data. [Foreign Language] And we also actively explore the possibilities of participating in a stake in one of the credit bureau agencies. [Foreign Language] In conclusion, we think the indirect data transfer only changed the protocol of the process and it will add some cost, but the cost is not going to be material. And it doesn't impact the outcome of the business and the risk assessment results. [Foreign Language] As data management becomes more standardized and transparent, we believe we have the opportunity to secure higher and better data quality sources to further improve our operation efficiency. [Foreign Language] And throughout the year, our asset quality has been improving progressively. And in the second quarter, we expect our vintage delinquency to be around 2.3%. [Foreign Language] In the future, we have the competence to maintain our delinquencies at this level. As you know, lowering the pricing will also help to improve the risk level like what we have experienced from our P2P transition.

[Operator Instructions]. Next question comes from Henry Lin [ph] with Gold Dragon [ph].

Congrats on the very strong results. Just two very quick questions to follow-up. The first one is, can you provide some more color on the breakdown for your international business, like loan facilitations, volume for different countries? And the second thing is like, I know that we just talked about the cap of your profitability under 24%. Do you have concrete guidance or rough earnings estimate, like how much earnings downside/upside will we have next year when everything is under 24%? [Foreign Language]

This is Feng. Just quickly, in terms of country, international market country breakdown, our Indonesia market accounts for about three quarters of our volume, profit. And the Philippine and Vietnam in total account for the rest. And Vietnam is just starting, so at a very early stage. Now, in terms of the profit impact for the price regulatory change shift, I think we can just do a quick math. As we mentioned, currently, our average IRR is about 25.4%. And we have – the loans, they are facilitated by us. Outstanding is about RMB 40 billion. So, if we do the math, RMB 40 billion times – let's say, like, if we reduce to 24%, that's a drop of roughly 1.5%. So, that's RMB 6 billion. Sorry, RMB 600 million pre-tax profit impact. Now, in reality, we may maintain some of our volumes at a rate below 24%. So, the impact may be a little bit more than that. But again, that's the static version, as we mentioned. Now, in reality, what we think will happen is we will continue to drive down our loss rate, and we think there's a very good opportunity with – now, with the market, we'll have much more limited asset supply for this sector. There are lots of players, they operate between 24% and 36%. In fact, very close to 36%. It's going to be very, very difficult for them to adjust their business to 24% without a – either will not be able to do that or they will do that, but with a huge impact on their volume. So, the asset supply for this sector is going to be very limited. And with that, I think there's a great opportunity for us to further improve our funding costs with better negotiation power with our funding partners, with our institutional partners. And then lastly, as we increase our business volume, the size of our business, the fixed cost component, which is a big chunk of our total costs, as we are such a research heavy company, we spend a lot of – it's really a lot like human capital cost is going to be – the efficiency is going to be higher. The fixed cost is going to be a smaller percentage of our total revenue. So, with all these improvement opportunity ahead of us, we actually think we can limit the profit impact to a significantly smaller impact than the number I just indicated.

Basically, under that math, it looks like we will still have a very material growth. Like, if everything holds constant, we'll still have a material growth of earnings at 2022 from last year's level. But this year is still like above 24%. So, next year versus last year, it's still material growth.

We certainly hope so. But I think people may have a different understanding of material. So, I do think that the 24% cap is going to have some impact in the short term in terms of profitability. But I think that the key message here is, from all these aspects, we believe the impact is going to be fairly manageable for the short term. And we think, if we look at the medium to long term, it's going to be a good thing for the industry and for our company.

Just one very quick follow-up. On the international business, have we been considering US as the potential area to enter? Because given how strong Upstart has been doing both on their business, on the share price in that market? Are we like under any future plan of answering that and share some of economics there?

We have been paying some attention. But as of now, we don't have a concrete plan to enter the US market. I think we mostly are focusing on developing worlds. One of them, Upstart, has a very high valuation. But it's still something we're trying to figure out. But I think when we look at medium to long term, we are pretty happy with the mainland market and the developing world, particularly the Southeast Asian market. We think it's big enough for us to play for the years to come.

[Operator Instructions]. The next question comes from Harry Wu [ph] with China Securities.

[Foreign Language] Would there be any further changes to the regulatory policies on user privacy, especially user data collection and what kind of response the company would do to ensure that business is not affected?

[Foreign Language] Last Friday, there was an introduction paper on the scope of personal data protection and also on the consultation paper on cross border data transfer. [Foreign Language] On the personal data protection front, there hasn't been much changes. The focus is always on the minimum required standard. And we have also received the App Security Certification and App Information Security Certification with Level 3 rating from China National Computer Virus Emergency Response Center. [Foreign Language] On cross border data transfer, we have maintained all the information collected in China to remain in China whereas all the information collected in the international markets remain in their respective countries. [Foreign Language] This regulation is still relatively new and still evolving, and we will continue to closely monitor the developments of the regulations.

[Operator Instructions]. As there are no further questions, now I would like to turn the conference back over to the company for any closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact our IR team. Have a nice day. Good night.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.