Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Limited Second Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. Now I would like to hand the conference over to your speaker host today, Ms. Liu Xinyan, 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 development 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 Choy, 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'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. 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 attain higher quality new loans we enabled. We also drew closer to our goal of transitioning to a 100% guarantee model and continued our strategies to mitigate risk and diversify business. Let me provide some updates for the second quarter. First, China's macro economy steered [indiscernible] to recovery and landscape remains complex. In the second quarter, China's GDP demonstrated our 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 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 Cheung 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 sovereign 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 remains challenging in the second quarter. And it may take more time for the SBO segment…

Thank you, Y.S. I will now provide more details on our second quarter results and our operational focus for this year. Please note all figures are in renminbi unless otherwise stated. During the second quarter of 2023, our performance was negatively impacted by the challenging macro environment faced by SBOs. Our total income was CNY 9.3 billion, representing a decrease of 8% compared with the first quarter of 2023. This was mainly due to a decline in loan balance as well as reduced new loans enabled and continued pricing pressure from our credit insurance partners. Despite the challenges on our top line performance, we increased net profit to CNY 1 billion this quarter, up from CNY 0.7 billion in the first quarter, primarily resulting from our ongoing cost optimization. Now let's dive into the details of our performance. In the second quarter of 2023, our new loans enabled were CNY 53.5 billion, representing a sequential decrease of 6.1%. Our outstanding balance of new loans enabled decreased by 13.9% during the same period. These declines were mainly due to a weaker high-quality demand for loans, coupled with our prudent business strategy of employing tightened credit standards on new loans enabled. Though new loan sales remained under pressure, our direct sales productivity bottomed out in the first quarter and began to show signs of rebound in the second quarter. Average productivity for the direct sales team increased by 10% sequentially in the second quarter. During the second quarter, 61% of new loans enabled came from the direct sales team compared to 56% in the first quarter. In addition, we're confident that we are on the right path to prioritize higher-quality customer segments concentrated in more economically resilient geographies. As Y.S. mentioned, early indicators of new loans enabled after we tightened our credit…

Thank you, Greg. I will now provide a close look to our second quarter results. Please note that all numbers are in renminbi terms and all comparisons are on a year-over-year basis unless otherwise stated. In the second quarter, our total income was CNY 9.3 billion, while total expenses decreased by 27.2% to CNY 8 billion. The decrease in total expenses was primarily due to the decrease in new sales and marketing expenses. As a result, our net profit was CNY 1 billion in the second quarter of 2023. Next, let's look at our total income. As Y.S. and Greg mentioned before, our performance was impacted by the complex macroeconomic situation affecting the SBO segment. This resulted in a 39.4% decrease in our top line this quarter. In the second quarter, our technology platform-based income was CNY 4.1 billion, representing a decrease of 44.8%. Our net interest income was CNY 3.4 billion, a decrease of 32.8%. And our guarantee income was CNY 1.1 billion, a decrease of 40.7%. As a result, our technology platform-based income service fees as a percentage of total income declined to 44% from 48.3% a year ago. In addition, due to the increase of income from our consumer finance business, our net interest income as a percentage of total income actually increased to 36.3% from 32.8% a year ago. Furthermore, due to the decline in loan balance and a lower fee rate, guarantee income was CNY 1.1 billion as compared to CNY 1.9 billion a year ago. Our other income, which mainly includes account management fees, collections and other value-added services charged to our credit enhancement partners as part of the retail credit enhancement process was CNY 310 million in the same quarter of 2023 compared to CNY 532 million in the same period of 2022.…

[Operator Instructions] We now have our first question from Alex Ye of UBS.

I have two questions on the loan demand side. So in the past few months, have you noticed any change in terms of your SME loan demand, for example, the application volume? And have you seen any sign of a sequential recovery? Or is it actually weakening? Second, I'm wondering if you have done any underground survey on your existing SME customer base regarding what you're [pulling back] their demand or what could potentially make them more positive? And in particular, I'm wondering if you think the current property downturn has anything to do with the weak demand from high-quality borrowers. For example, maybe they will suffer from the negative relative [fail] or maybe they think the property prices declining, which makes them like willing to risk their assets. I'll stop here.

Thanks, Alex. This is Y.S. answering your question. If you look at other market data such as total social financing or the bank loan, you can see that the market demand is not in a good shape, it's quite weak. And likewise, our high purchase for loan demand was weak indeed. While we believe the recovery of China [indiscernible] in the long term, but we believe it takes some time, especially for our SBO segments to recover that underpins our loan demand. Mostly our loan demand is driven by borrowers' willingness to borrow which, in turn, is mostly affected by how they see the investment opportunity and then how they see near-term economy for their business, right? So knowing that, we believe it will still take a while to receive the turnaround of loan demand from the high-quality SBO segments.

We now have our next question from Emma Chu of Bank of America.

I have 2. The first one is about your loan growth outlook. So we do notice that the management has already guided down to your full year loan growth to CNY 180 billion to CNY 210 billion compared to around CNY 300 billion previously. So could you tell us more what drove you to lower your full year loan growth plan? And further, could you tell us a little more about the loan mix of your new loan growth plan? As you mentioned earlier, you want to grow more of your consumer loan considering the weak demand on your SBO segment. And the second question is about the asset quality trend. So we do notice that your flow rate stayed flat sequentially in second quarter, partly due to the contracting loan balance. But how is the underlying trend of your legacy loan book? So from a vintage perspective, do they continue to improve? And what's your expectation of the asset quality trend in rest of the year?

Just before, Greg provided our new guidance on new sales for this year, right, which is in the range of CNY 190 billion to CNY 210 billion for this year. The reason is, the reason of adjustment is the recovery of new loan sales will mainly depend on the recovery of macro demand. And then as I said in answering the previous question, we do not expect a quick turn on of this demand side or recovery of macro economy in near term, especially for SBO segments. So that's why we adjust our new sales guidance. But at the same time, we, as also Greg said, we expedite our customer finance business growth. So it takes more and more part of our new loan sales. Our strategy is mainly to prioritize quality over quantity knowing that we are bearing increased risk with 100% safe guarantee model. But we believe this will eventually be a good foundation for long term for our sustainable profitability. Regarding asset quality, if you look at our net flow ratio over C-M3 net flow ratio, it didn't change from the last quarter and then it still remains elevated from historical levels. As we said, it's mostly because our declining new loan sales, thus decline in loan balance. But if you look at -- if you want to have a different look free from this balance change, the [ full ] new loans generated in 2023 this year, we can see obvious improvements in the asset quality as compared with all the vintages. Although it's obviously better than last year or 2 years ago, but it has not fully recovered back to before pre-COVID level in 2019. So in concluding in short, the asset quality for new loans obviously improving. But as a whole portfolio, you cannot see the incremental net flow because of declining balance.

We now have our next question from Chiyao Huang of Morgan Stanley.

I have two questions. One is, could you give us a little bit more color on the latest progress on the transition to 100% sure guarantee, especially with the arrangement with the funding partners? What type of institutions have been signing up for the new guarantee model? And what's the new credit line given by those funding partners and how does that compare to previous CGI model? And the second question is, could you elaborate a little bit more on your new product strategy and client and strategy because we're obviously transitioning to a higher quality or lower risk borrowers, but we're still targeting around 20% loan pricing? So I guess I'm just wondering what's the strategy to achieve that end while maintaining a similar pricing?

Sure. Greg here. I'll answer your questions. On the transition to the 100% guarantee model, we are very much in good shape that if we want, by the fourth quarter of this year, 100% of all new business can be done under this model. And that is what we will probably shoot to achieve. We've got out of our funding partners on ongoing process, so with 84 funding partners, 46 have already agreed to extend and out of this 46, a number have already starting to operate and cooperate with us under this model. This cuts across all types of funding partners. So be it large banks, mid-bank, smaller-sized banks and other trust-related cooperation that is -- it's across the board. So there isn't a trend that says it's just small banks signing up for the new model. It is really all types. In terms of credit line that we were able to achieve with our funding partners under having the credit insurance versus now the guarantee, it is a transition process. Roughly, if you look at the line -- I mean, some give actually more, some give less. But on average, we're probably seeing a reduction of about 40% -- 40% to 50%. But in the context of our focus on higher-quality customers and being more selective on regions in terms of the new business volume that we expect to generate this year and into next year, we have more than enough capacity with what we've got in place. The new guarantee model, based on our experience even in the past with CGI, once an institution cooperates with you on a model, they're comfortable with the performance, the chance to increase credit lines going forward is always there. So I think from a funding availability under the new model,…

Our next question comes from Yada Li of CICC.

This is Yada with CICC. And I just have one quick question for today. Could you please share more color on the F1 '23 outlook of the top line and bottom line? And how do I understand it in the current macroeconomic environment? And that's all.

All right. I think we did have a statement on our full year new loans outlook in our earnings release. It's due to record gains. Here, let me comment some more about how the top line -- but the bottom line may evolve with this kind of changing. First, on the top line, inevitably, the top line will be affected by the decrease of the [indiscernible] as a result of our more stringent credit acceptors criteria that we mentioned earlier. Of course, the decrease in the new sales we return affects the average loan balance, thus will also have an impact to the revenue. These 2 impacts will be mitigated by the improvement in take rate when we transition to the 100% guarantee model. For the bottom line, I think we've mentioned before, when our new business model moved towards the 100% guarantee model, a significant portion of our expected credit loss provisions of new loans will be front-loaded in day 1. From an accounting perspective, of course, they don't have any impact on the cash profit in that sense. Whilst the revenue is recognized throughout the loan's life cycle, as such, our bottom line will be suppressed in the second half as we accelerate the transition to the 100% guarantee mode. However, let me reemphasize one more time. This shift, we expect to have positive results in the longer term and support our U-shape recovery once the majority of the portfolio is supported by 100% guarantee model.

Thank you. That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks.

Okay. Thank you, operator. This concludes today's call. Thank you all for joining the conference call. If you have more questions, please do not hesitate to contact the company's IR team. Thanks again.

Thank you. That concludes the call today. Thank you, everyone, for attending. You may now disconnect.