Hello, ladies and gentlemen. Thank you for participating in the Second Quarter 2022 Earnings Conference Call for FinVolution Group. At this time, all participants are in 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 2022 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 e-mail alerts by visiting the IR section of our Web site 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 certain 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 prepared and presented in accordance with U.S. 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 U.S. 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 U.S. 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 Web site 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 for joining our earnings call. The second quarter of 2022 was a challenging quarter with Shanghai under COVID lockdown until June 1, 2022 and many other major cities also experienced varying degrees of lockdown or restricted mobility during the quarter. All these unprecedented challenges significantly affected China's economic growth and exerted additional pressure on certain aspects of our operations. However, we were able to navigate all these challenges and achieve better than expected results thanks to the experience and insight we have accumulated during our 15 years of operations. Consistent investments throughout our chain of technologies enabled most of our employees to conduct their work from home during the lockdown, minimizing disruptions to our operations. Also, our stable and capable senior management team with pragmatic goals, coupled with an in-depth understanding of the industry, seamlessly executed our decisive strategy despite micro obstacles. Together with the company's ongoing transition towards better quality borrowers in both domestic and international markets, coupled with our long-term goal of financial inclusion, these advantages further contributed to our growth momentum in this challenging quarter. Encouragingly, our total transaction volumes steadily increased for the ninth consecutive quarter to reach RMB41.5 billion, up 24% year-over-year and 4.5% on a sequential basis. Driven by our stable, better quality borrower base, we achieved a solid set of operational metrics despite weak and macroeconomic conditions. The total number of unique borrowers in the quarter remained stable at around 3.1 million. Additionally, our total outstanding loan balance further extended to RMB56.4 billion as of June 30, 2022, representing year-over-year growth of 44% and a sequential growth of 5%. With respect to our strategic transition toward better quality borrowers, our proportion of Category A and B borrowers in the domestic market who meet our highest credit…

Thank you, Feng, and hello, everyone. Welcome to our second quarter 2022 earnings call. In the interest of time, I will not go through all of the financial items on this call. Please refer to our earnings release for further details. As Feng mentioned, we are encouraged that despite multiple challenges in the second quarter, we still achieved the transaction volume growth for the ninth consecutive quarter. We're maintaining our risk metrics at a relatively stable level, with our transaction towards better quality borrowers coupled with strengthened relationships with funding partners and the consistent technological enhancement. The loan approval rates from our funding partners rose to around 80% in June compared with 65% in the same period last year. We have cumulatively cooperated with around 70 licensed financial institutions and will continue to foster a strong and robust pipeline of potential partners. As a percentage of our better quality borrowers continuing to increase, we expect our funding costs to reflect ongoing improvement during the next several quarters. Driven by our consistent efforts in research and development, we have continuously enhanced our chain of technologies throughout our operations, including customer acquisition, fraud detection, credit risk assessment and customer service, among others. Consistent improvements in numerous operational metrics across multiple market cycles clearly illustrate the effectiveness of our tech refinements. Bolstered by these strengths, our net revenues for the second quarter rose to RMB2.7 billion, an increase of 12% year-over-year. Even more encouragingly, we also delivered a strong non-GAAP operating profit of RMB682 million and maintained a substantial balance sheet with RMB11.4 billion in total shareholders' equity as of June 30, 2022. During the second quarter, our average borrowing costs were 24.2% compared with 26.2% in the same period last year. Of particular note, all loans originated for our new borrowers were…

We will now begin the question-and-answer session. [Operator Instructions]. And our first question will come from Frank Zheng of Credit Suisse. Please go ahead.

[Foreign Language] Thank you management for the opportunity. This is Frank Zheng from Credit Suisse. Congratulations on a good set of results despite the headwinds. So I have two questions. The first one is on volume. How does the company view volume growth in the second half? Based on the current guidance for the first three quarters, volume is expected to reach around RMB125 billion to RMB126 billion. So is the progress to deliver the full year guidance of RMB175 billion to RMB180 billion still on track? And the second question is more specifically on international markets. How does the company view the contribution from international markets to volume and take rate, and what is company's outlook for international markets? Thank you very much.

[Foreign Language] Okay. Hi, Frank. Let me do the translation for this question. First of all, we still maintain our full year guidance of 175 billion to 180 billion. However, there are still uncertainties because the COVID outbreak is still happening in many different cities. And therefore, we will still adopt the prudent approach. We have accumulated experience and technologies and refinements during this period. And therefore, we are still able to maintain a healthy and progressive growth in spite of the very challenging macro environment. [Foreign Language] Our international business began transition to superior quality since the second half of 2021. We can already see that we have completed the transition, for example, in the second quarter, although our transaction volume growth is only 6%, but our outstanding loan balance has increased by 33% quarter-on-quarter. And our proportion of installment loans has also further increased to 85% from 55% in the previous quarter and from only 20% in the same period last year. And with a larger number of superior quality borrowers in Indonesia, the proportion of loans funded by local institutional partners increased to 39% compared to 14% in the previous quarter. Our international business transition progress has been better than expected. And in the third quarter, we expect transaction volume to be around 1.1 billion, up 20% quarter-over-quarter and outstanding loan balance to increase around 40%. As our international business has completed its transition to better quality borrowers, we believe we will enter into a growth stage.

Many thanks.

Thank you, Frank.

The next question comes from Yada Li of CICC. Please go ahead.

[Foreign Language] The first one is by the end of 2Q '22, what are the average prices of our loan products in both our existing assets and the new originations, respectively, and what is the proportion of high interest rate assets in the total outstanding balance of our loans? And looking forward, when can we expect to see the endpoint of the pricing adjustment and to see a relatively stable take rate? This is the first one. And the second one is, what is the trend of our risk indicators such as 90-day delinquency and some leading indicators? And regarding the asset quality pressure, have we seen the peak already? And as for the underlying reasons for improving the asset quality, is it because of our active change in customer acquisition, operation and risk control? Or can we just view it as a natural response to the improvement of our macro economy and the recovery from the COVID-19? Thanks, management.

[Foreign Language] Now let me do the translation for this question. From the outstanding loan balance and transaction volume perspective, we believe it is similar because of our loan tenure is relatively short at about eight month plus. And let me just remind you that in the fourth quarter last year, around 80% of our loans are already under IRR 24%. And in the second quarter of 2022, our average loan pricing is around 24.2% in terms of transaction volume. And also all loans [indiscernible] for our new borrowers are already under 24%. And we believe we are ready and have completed the pricing adjustment process. Our business model is healthy and we still expect growth to continue. [Foreign Language] Sorry. Let me just finish the translation. We believe that there is more room for us to continue with our transaction to better quality borrowers with further improvement in funding and also in our risk improvement. We estimate the average pricing in the third quarter will be around IRR 23.5%, and we maintain a take rate of around 3.7%.

Let me quickly add just to be more specific to the question about when do we expect the price adjustment to be done and when do we expect the take rate to be stabilized? So the fact that we believe the regulatory environment for pricing regulation, we don't expect major changes in the foreseeable future. And given our pricing is around 24%, we believe the price adjustment work is mostly done. Now as we continue to move upscale in our customer quality, we do expect the price to very gradually drop as the customers' quality improve, because better customers enjoy a lower price. But it's going to be very gradual and coupled with the reduced funding and improved risk efficiency. So overall, we believe our take rate going forward will be stabilized at the current level, around 3.7% as was just mentioned.

[Foreign Language] Okay. Let me just do the translation. Let us just recap some of the risk metrics. Our Q2 vintage is expected to be around 2.4% and our loan collection rate from one to 30 days further improved to 91% from 90%. And our delinquency rate peaked in April and May and it has since returned to 2.3%. You can see that there are some fluctuations during the COVID period. However, the fluctuation for us is very small as it only increased by 0.1%. And we believe that for us, our company is based in Shanghai and the impact for us is larger than a lot of companies because the vast majority of our core management and employees are headquartered in Shanghai, and we have been locked down for three and a half months during the Shanghai lockdown period. [Foreign Language] Give me a moment please, and I will do the translation. Okay, the reason can be that our determination in our transaction to better quality borrowers since two years ago and also our ability has been growing in our change of technologies from customer acquisition to fraud detection to allocation of funding, et cetera. I would like to highlight two of our notable technologies. For our customer acquisitions, we have the Octopus smart acquisition platform. Under the traditional account management, one person can only handle up to three accounts. But our Octopus Platform enables one person to handle over 30 plus accounts and this increased our efficiency a lot. And when setting up advertisements under the traditional method, you will need around three hours to set up 100 advertisements. However, with the Octopus Platform, we only need about five minutes to set up 100 advertisement and we can save a lot of time. And another technology that we are using is the fraud detection is the Ming Mirror fraud detection system. This system is able to leverage our knowledge graphs, utilize complex network computing, machine learning and over 2,000 models and better with billions of relational data. We are able to uncover up to 65% of intermediary fraud during the application process. All these technologies enable us to encounter challenges, external challenges and uncertainties during the COVID situation.

The next question comes from Alex Ye of UBS. Please go ahead.

[Foreign Language] So to translate for my question, first one is on funding costs outlook. Could you share with us how much more room to expect for it to improve for the rest of this year? And second question is on your asset quality. Could you also give us an update on the latest trend on your day one delinquency in, say, July and August? And also are there any material differences between your SME customers versus your overall portfolio? And thirdly on the consumer credit demand, the macro data has been weak. And from your perspective, have you seen the application volume declining materially from same period last year and how has been the latest recovery trend? Thank you.

[Foreign Language] Alex, let me do the translation for the first question. In the second quarter versus the first quarter, our funding costs improved by 31 bips on a sequential basis. During the COVID period, our partners were very concerned about the risk metrics fluctuation but we give them confidence with our stable risk performance. And in the third quarter, we expect further improvement in our funding costs of between 20 to 30 bips improvement in funding costs. [Foreign Language] Let me do the translation for question number two as well. Our day one delinquency rate was around 5.5% in the second quarter, and we have seen improvements since then. And in the second quarter, we serve over 500,000 small business owners with over 10 billion in transaction volume. And before the pandemic, the credit performance of our small business owners is around 10% better than our retail borrowers. During the lockout period, we have seen the risk metrics of small business owners is slightly higher than the retail borrowers. And in the second quarter, we have also observed that the risk level for small business owners have returned to similar levels with the retail borrowers. And going forward, we expect the risk metrics for small business owners to fall below retail borrowers. [Foreign Language] Alex, let me do the translation for the last question as well. Regarding the customer demand, the data from the overall consumer data is rather complicated. It will be affected by various factors. For example, the macro environment impact affecting consumer confidence, the stimulus policy impact on liquidity and the post pandemic recovery impact on consumption. If you take into consideration of all these factors, the overall consumer consumption has been rather stable with limited fluctuation within 1% to 2%. Our data can also prove that the loan application demand has been relatively stable in the second and third quarter.

Thank you.

The next question comes from Thomas Chong of Jefferies. Please go ahead.

[Foreign Language] Thanks management for taking my questions. My first question is about competition. Given the pricing is trending to 24% and going forward, how should we think about competition with our peers and traditional banks? And my second question is about the international business. How should we think about the areas that we can replicate from domestic to international? And are we seeing any differences in the behavior between the borrowers in these two areas? Thank you.

[Foreign Language] Thomas, let me do the translation for you. Okay, we can view competition from a few different perspectives. Number one, China market is large and still growing. And number two, compared with the traditional financial institutions, we are still not in the same segment as them as their pricing is much lower. If you think about this, there are 7,000 traditional financial institutions. And number three, the players in this market has been reducing a lot. And in finance market, it is very different from the international segment because it is not a winner-take-all situation. And we feel that competition is still relatively okay, and we are still very confident of the future growth.

Hi, Thomas. This is Feng. Let me take the second question. So with regard to our expansion internationally, I think there are a lot of things we can and we are leveraging from our domestic experience. I think the most important thing is, please remember that we have 15 years operational experience in the China market. So if we think about the international market, and we are mostly in the developing countries, and particularly in Southeast Asian region, in terms of fintech developing stage, probably somewhere around five to 15 years ago, if you compare to China, around that period. I think there are many aspects, but I would say like Indonesia is probably around, kind of like similar to 2014, 2015 period of domestic China. I think the credit infrastructure is still undergoing pretty rapid improvement, and the market is growing very fast. And I think if we -- for another country we're operating in, Philippine, it is probably like in a few years behind Indonesia. So I think the experience we have accumulated these years are very, very valid and valuable for our expansion for our development in Southeast Asia market and additional future other developing countries. I think it is on systems, on knowhow and on talent, right? So we have a very experienced team. For example, one of the things that I think is particularly relevant, if we are thinking about building a valuable and sustainable business in Southeast Asian region is our experience in transitioning or transforming our business from a high pricing population strategy to a very healthy low pricing, high quality customer base strategy. Current state with credit infrastructure situation in South Asian market, inclusive of finance, the pricing is higher than what the domestic China market has, which is normal. I think, match the developing stage of those markets. But as we move forward, we're going to see price drop both from regulatory requirement's perspective and from the economic development and the market competition perspective. And that journey we went through in China, and our team has tons of experience in that. And that kind of like explained why we managed the transition in our Indonesian market for the last one year period of when we moved upscale, pretty good speed that Alex [ph] has just mentioned. So I think those experiences are very valid and makes us feel very confident, coupled with -- if we think about, hey, in China like 2014 and 2015, we're very optimistic about the growth prospects in those markets, and we think our experience is going to help us become a leading player in those markets. Thanks.

Thank you.

This concludes our question-and-answer session. I'd like to turn the call back over to the company for closing remarks.

Hello, everyone. Thank you for joining FinVolution second quarter earnings conference call. If you have any further questions, feel free to reach out to our Investor Relations team. Have a nice day.

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