Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Ltd Second Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Mr. Yu Chen, the Company's Head of Board Office and Capital Markets. Please go ahead, sir.

Thank you very much. Hello, everyone, and welcome to our second quarter 2021 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman, Mr. Ji Guangheng, who will start the call with some general updates on our achievements, share our thoughts on recent regulatory developments and industry dynamics, and provide our plans for future business. Our Co CEO, Mr. Greg Gibb will then provide a review of our progress and details of our development in the quarter. Afterwards, our CFO, Mr. Xigui Zheng will offer a closer look into our financials before we open the call for questions. In addition, Mr. Yong Cho, our Co CEO, and Mr. David Choy, CFO of our Retail Credit Facilitation Business will also be available during the question-and-answer session. Before we continue, I would like to refer you to our Safe Harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please also note that we'll be discussed non-IFRS 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 filings with the SEC. With that, I'm now pleased to turn over the call to Mr. Ji, Chairman of Lufax.

Hello, everyone. And thank you for joining our 2021 second quarter earnings call. I will start with some general updates on our achievements in the first half, and then share our thoughts on recent regulatory developments and industry dynamics before providing our plan for future business. First, update in the first half. Generally speaking, all the Chinese ADRs stock prices have seen increased volatility recently, due to changes in macro policies and market conditions. At Lufax, we managed to deliver improvements in our operating performance, regulatory compliance and corporate governance in the first half. First, we achieved high quality growth in our core business. For the first half our total income increased by 17% year-over-year and net profit increased by 33% year-over-year. Later in the call Greg and James will elaborate more. Second, we responded to regulatory caused by phasing out our peer to peer production in smooth and compliant manner. In the second quarter, we substantially completed the run of legacy peer to peer products and further strengthen our regulatory compliance. Third, we continuously enhance our corporate governance by restructuring our Board of Directors and establishing committees in key focus areas, including risk management, consumer protection, and ESG. We will also be actively advancing the seventh establishment of our ESG systems. Fourth, on May 24, 2021, our company announced US $300 million of share repurchases. As of June 30, 2021, we have substantially completed repurchase. In addition, our senior management purchased US $5 million worth of shares using their personal fund. While there are still uncertainties in the market, our stable profitability, strong operating cash flow, abundant cash reserves and the actions we took to private our business data hours, understanding regulatory requirements all give us strong confidence about our future prospects. As that I'm pleased to announce a…

Thank you, Chairman Ji. Although the regulatory environment continues to transform and some uncertainties remain, our business performance is sound. Let me get straight into the key figures noting that all numbers are in RMB and all comparisons are in a year-on-year basis unless otherwise stated. Profits in the first half reach RMB9.7 billion, up 33.4% versus a year ago. Our second quarter profit was RMB4.7 billion, up 53.2% versus a year ago. Our second quarter revenues of RMB14.8billion grew 17.3% versus last year. Our second quarter total operating expenses of RMB7.1 billion was decreased by 1.7% for the same period. As a result, our net margin reached 31.9%, a 7.5 percentage point improvement over the second quarter last year, driven by ongoing improvements in operations and technology. We are confident that profit growth levels achieved in the first half will be sustained throughout the balance of this year. On the back of the solid performance, it is important to note our strong balance sheet and cash position. As of June 30 of this year, our net assets reach RMB91.1 billion of which approximately RMB42 billion liquid assets maturing returning in 90 days or less. Our net cash flow has increased by RMB9.6 billion in the last 12 months. This strong position allows us to do several things. First, it provides us with a resilient ability to meet any new capital requirements that may come from regulatory changes. We believe that in lending facilitation, all platforms, regardless of business model or customer segment will ultimately be required to bear 20% to 30% of related credit risks, with a capital leverage of no more than 10x with a portion of shared risk. In the second quarter, excluding the consumer finance subsidiary, we bore credit risk on 16% of all new loans…

Thank you, Greg. I will now provide a closer look into our second quarter operational and financial results. Before I begin, let me remind everyone that all numbers are in RMB terms and all comparisons are on the year-over-year basis unless otherwise stated. Our second quarter of 2021 results characterized by strong business growth, continued operational improvement and extended profit margins. Our total income increased by 17.3% to RMB14.8 billion, while our core business income excluding investment income grew by 19.1%. Our net profit increased by 53.2% to RMB4.7 billion, exceeding our earlier guidance of RMB3.7 billion to RMB3.9 billion. Our net margin reached 31.9% in the second quarter, a 7.5 percentage point improvement from the second quarter of 2020. Fourth, [Indiscernible] our continued growth and profitability are four key factors. First, we further optimize the unit economics in our retail credit facilitated business even as we reduce our all-in cost. Our loan balance ADR declined by 2.7 percentage points to 34% in the second quarter of 2021 from 26.7% in the second quarter of 2020. While our take rate based on loan values improved to 9.7% from 9.5%. And our net margin also extended over the same period. This achievement is a result of four initiatives. First, we continue to increase our number of banking partners and diversify our funding sources, which have allowed us to obtain cheaper funding from partners with better asset quality. Second, the credit insurance premium on our loan portfolio has also been reduced as our insurance partners took the better credit and the customer quality into consideration to lower their pricing and without a greater portion of the credit risk. Third, the early payoff effect decreased significantly because we have changed the way we charge our customers. Fourth, we achieved significant efficiency gains in…

[Operator Instructions] Your first question comes from Winnie Wu from Bank of America.

Thank you very much for giving me this opportunity. And congratulations for a solid second quarter results. I guess two things. Firstly, in terms of the credit business, can you provide the latest numbers in terms of the effective ADR in second quarter this year both for the new business and also for the total outstanding loan balance? So the ADR and then the breakdown of funding cost that CGI and EPO. Second question is related to what Chairman Ji talked about on the information and credit license, credit bureau, credit scoring license. Can you talk about any progress any application if you're applying for the credit scoring license and any expectation on that? And also with the new regulation restrictions on the usage of credit information. Is that going to impact how much data, credit data Lufax is able to access or the scope of data that you're able to leverage on. And is that going to impact your credit scoring. Thank you very much.

Thanks Winnie. I think on your first question, what we have just disclosed for the second quarter on the overall portfolio, is that the ADR is 24%. And that's down from 26.7% a year ago; we don't disclose the rate for the new loans. But what you can very clearly calculate is in order for us to go from 26.7%, down to 24%. That means that the new loans that we've been issuing, clearly one have all been below 24%. And at least a couple 100 basis points below 24%, in order to get that overall average of 24%. And so this is something that we've been doing for some time. And we'll continue to execute that.

Yes, probably what I can add is, if you look at this [Indiscernible] this closest number, if you can look at our [Indiscernible] our ADR decreased by almost 6% from one year ago, but take rate remain almost unchanged. So they are to stay and as to your second question about the data sharing with banks, we are credit licensed company, their regulation are traded with Chairman Ji, we met PBOC a few times. And then also we have probably about two questions. The first is whether we need a credit license. I'll give you; the outcome process of data collection, ensuring we have no debt is fully within, and it's perfectly within the guarantee business, the approved scope. So we think we don't need this credit license, if we need we miss that all arbitrary companies or other insurance companies who see that business, see results, they all needed credit license. But we take unit, we talk by credit license while you can join others as a shareholder, first of all, we talked to this, we got - and confirm whether we need to have this license or not. The second question we have here is then what process do you need to change to follow this regulation. We might need to share our data, we want to partner to the company who has credit license going forward. And this regulation becomes effective from the end of last year.

Next year.

From next year, - next year and now we are working with a one credit license company and then working on the new process. So we are probably ready within first half next year. And then in case we need to take a project but it's not confirmed yet, we are working on it.

But in terms of scope of data wise that we can access or we need to use doesn't get impacted by this new structure.

There is one small impact, how we collect data, there are three types of data. The first is personal information that we collect directly from borrowers, and it does not change. And the second data is the PDS data taken directly, getting data from PDS, PDS does not change, the prototype that other customer defined as a data insurance data, how to collect those with personal asset data that we have to collect through the company's credit license going forward, that is our understanding. So in all we didn't must impact our opinion.

So it was Vice Chair our Co CEO responsible for retail credit facilitation venue who just answered on top of that, I just want to add that we are maintaining very active dialogue with the credit scoring viewer of the PBOC all the relevant key decision makers within the bureau. So far, there's no material impact to our business model. And based on what they've indicated to us, there's no need for us to change now. I think their key focus is on the data or the information you collected, whether you could use it for yourself, or do you actually pass it on to external parties, or in some cases even monetize on that data. We believe that is their key focus, they're also asking us to our views, what it would like to share our data with credit bureaus. And our response was, look, if there's a PBOC requirement and everybody's required to do that, we will comply. Again, their key focus is on whether we accumulate, whether the data we accumulated or stored is just for self-use, or will be passed on to third parties or [Indiscernible], of course, that's something we'll never do. They also recognize that we run quite a different business model by our guarantee company. So far, that's the communication we've all had. We don't need to make any changes right now. We'll continue to have those conversations and let the market know if we hear anything otherwise.

Your next question comes from May Yan from UBS.

[Foreign Language]

Yes, let me ask comment on the question number two first and then I'll answer question number three. The question number three is about loan weight should be within 24% by June 2022, right. This requirement was given to save companies. And it's very precise what they said is total borrowing costs should be less than 24% for renewals by June 2022 and average ADR should be less than 20% within three years' time, meaning that by June 2024. That's what they said. And then we believe this will become like a standard regulation for all. And this is because it will have no impact for us, if you can look at our peer company, as of today, highest ADR is less than 24%. And average ADR is less than 90%, so we already there. And then probably highest ADR is less 24%. And as of July our ADR for newer is all-in less than 24%. So basically, we see no impact from this new regulation. So we are in a very safe position. And the third question self-guarantee portion, in August this month, our self-guarantee portion for newer, we reach - final reach 20%. So we are done. And the next step whether we want to further move up to a 40% if we haven't decided yet, we are in discussion with our regulator, but once the demand we have to go up to 30% that we can do that very easily. We can because our company we have already more than RMB22 billion net assets, which is more than enough to support 30% asset guarantee a portion for newer.

Your next question comes from Thomas Chong with Jefferies.

Hi, good morning. Thanks management for taking my questions. I have a question regarding our wealth management strategies. I think we've talked a lot about ADR size. But how about the [Indiscernible] size? I think we have able to talk about some of the upgrade in terms of the product features including our integration - in terms of the interface. Can we talk about how we should think about our long term goal for [Indiscernible]? And, in particular, the progress that are made with our automated AI portfolio, as well as any competitive landscape or regulations that we need to bear in mind. I think that's my first question, and then follow up question is about the recent outbreak of COVID. Are we seeing any changes in terms of the fundamentals recently? Thank you.

Right, Thanks Thomas. It's Greg. On the wealth management business, as we summarize through the first half of this year, as of June 30, the growth will exclude the P2P portion was about 28%. And so this is a business we continue to want to develop as fast as we can. And we continue to see very good progress on our affluent customers on our qualified investors across a range of higher end products, including ongoing development for portfolio services, an automated matching, which we're doing here in China, but we're also looking into Hong Kong as that market starts to evolve, as well. So this is an area that we will continue to invest, we will continue to automate; we will continue to apply more and more data to it to make sure that our middle class customers are generating good returns, particularly as the market shifts away from fixed income to more variable return products. And this is an area that we continue to invest in. In terms of the COVID impact, I would say up to now we've not seen any impact is really too early and very, very narrow. I know that there are more headlines about it. But it really hasn't been anything that we've seen in terms of frontline impact.

Your next question comes from Katherine Lei from JPMorgan.

Thank you. I think my peers have asked a lot about regulatory risk. And then I'm going to have a follow up questions on the regulatory risk as well. I think just now management saying that, like the way to maintain a stable profit margin is to control costs, right? So first, can you help to elaborate, like what room to move, I have to continue to cut costs so that the overall takeaway will be more stable. The second questions I have on investors return. There's already like RMB1 billion of buyback being announced and executed, some of them are being executed so far. So what is the asset on the balance sheet that you believe is deployable for like buybacks? Or maybe in the future dividends n general, thank you.

Choy, if you want to speak first about the cost optimization area.

Okay, I think the future more data in the upcoming session, right. But if I give you a last picture, for US, for entrepreneurs, in the second quarter this year, our average ADR was less than 23%. But then margin state almost unchanged at around 4%. And lastly if you look at our components extending cost, CGI premium and each impact, you see that those are three numbers, obviously, including meaning decreasing, and going forward, we believe we can further optimize by about 2%. So we thought even if the over ADR goes out to close to 20% because we are confident with our main margin will be protected at around 4%, because I'm not saying that no matter how low ADR goes, we can deliver 4% margin, I'm not saying that, but is able to apply these around 20% that we are very confident that margin will not change.

And in terms of investor return, as we noted on our balance sheet and cash position, RMB91 billion overall, net assets RMB42 billion of relatively liquid assets with a 90 day so the share repurchase, the additional RMB700 billion taking us to RMB1billion still represents a very small portion of our total capabilities at this time. We will continue to explore other ways to generate returns for investors through all mean and we're exploring those structures and we'll certainly undertake them as soon as it makes sense to do so. But we certainly have a lot of room in which we to play.

As Greg mentioned that not only that we have a strong balance sheet in addition we have very strong profitability and cash carrying capability. In terms of the question you ask whether it's buybacks or dividends, I can say that we are considering again all means to return value to shareholder. Once there's a decision made we will be making the right announcements. The US $10 billion which is roughly RMB7 billion of buyback is small compared to the gunpowder we have on our balance sheet. And let's not forget by the end of the year we would have generated another RMB10 billion plus of profit and that will go, also go into our cash reserves and balance sheet.

Thank you. That does conclude our time for questions. I'll now hand back to management for closing remarks.

Thank you for attending our call today. And as mentioned earlier, the results are available online. And we will be having a number of one-on-one sessions with the sales analyst which we will elaborate more on our messages. Please do have full confidence that we have a very hard working management team and in the current environment where global capital markets view on China regulations, which caused a lot of volatility recently throughout the short not only that the companies have heard that I believe the relevant regulators in China have also heard the market views and subscribers have been telling me that today the biggest factors impacting Chinese ADR stock prices. Number one is regulation. Number two is industry, company specific fundamentals come later. Rest assured, the regulators have heard that and in a current environment, it is very prudent and as always be our principle to strengthen regulatory relationships, maintain open communication and make sure we are in the right side of the future direction. Thank you again for joining the call.

That does conclude our conference for today. Thank you for participating. You may now disconnect.