Ladies and gentlemen, thank you for standing by, and welcome to the LexinFintech Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded today. I would now like to hand the conference over to first speaker today, Mr. Tony Hung, Senior Director for Capital Markets. Thank you. Please go ahead, Tony.

Thank you, Operator. Hello, everyone, and welcome to Lexin's Second Quarter 2020 Earnings Conference Call. The company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and Chief Executive Officer; Mr. Craig Zeng, our Chief Financial Officer; Mr. Ryan Liu, our Chief Risk Officer; Mr. Stanley Zhao, our Senior Financial Director; and other members of our team. For today's agenda, Mr. Xiao will provide an overview of our recent performance and highlights, Mr. Zeng will discuss our financial results, and Mr. Liu will discuss our credit performance. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make forward-looking statements. Also, please note that this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi. I will now turn the call over to our CEO, Mr. Xiao, whom I will translate for.

Hello, everyone. I'm very pleased today to announce that in the second quarter, all our operating metrics grew in a stable manner. Our to be model is beginning to deliver and to provide us with a new avenue for growth. Thanks to new initiatives, we've again produced decent results. This quarter, our revenues reached CNY3.0 billion, an increase of 19%. Our gross profit reached CNY968 million, and our non-GAAP pretax profit reached CNY541 million, our new consumption platform strategy and our financial services business continues to expedite the growth of our to be model, providing us with risk-free Internet platform revenues of nearly CNY1 billion, of which, platform services was CNY419 million, an increase of 109%. In addition, revenues from Le Card memberships exceeded CNY24 million. This is our first time in disclosing these revenue numbers from our platform model. In the second quarter, we facilitated CNY41.1 billion worth of loans, an increase of 57.8% and exceeding our guidance of CNY38 billion. Our current loan balance is CNY61.9 billion, an increase of 52.4%. At the same time, our credit quality remains stable and risks are decreasing. As of today, our day-7 delinquency has declined to 2.32%, which is even lower than our numbers from the third quarter of last year. Under these conditions of growth, in the third quarter, we are expecting our loan originations to exceed CNY48 billion, an increase of over 30%. And we're also confident in our ability to achieve our full year loan origination guidance of CNY170 billion to CNY180 billion. At the end of the second quarter, our numbers of registered users reached 95.3 million, an increase of 90%. On August 10, our number of registered users reached over 100 million. Lexin successfully became one of the few consumption platforms to achieve that milestone, which…

Thank you, Jay, and hello, everyone. I'm pleased to announce that we have once again delivered strong results. In the interest of time, I will not go over line item by line item of our financials. For a more detailed discussion of our second quarter results, please refer to our earnings press release. Please also note starting from second quarter of 2020, we will be reporting revenue streams in three categories: online direct and service income, credit-oriented service income and platform service income in order to provide relevant information. Total operating revenue reached RMB 3 billion in the quarter, and the credit-oriented service income reached RMB 2 billion, representing an increase of 48.8% from the second quarter of 2019. Platform-based service income reached RMB 419 million, representing an increase of 109% from the second quarter of 2019. Adjusted net income was RMB 453 million, reflecting our continued strong growth and performance. Fully diluted adjusted net income for the quarter for ADS was CNY2.21. On our operating leverage, operating expense as a percentage of average loan balance was 3.9% for the quarter and now advertisement, marketing, advertising, G&A and R&D was 0.8%, 1.4%, 0.8% and 0.9% of average loan balance, respectively. We currently have 100 million registered users and our customer with credit line reached 22.7 million up by 68.4% as of June 30, 2019. We acquired nearly 1.4 million new active customers in the second quarter. Overall, our average credit limit was RMB 10,039, while our average tenure was now 11.4 months, our weighted average APR was 26.5% for this quarter. In terms of our funding, for the quarter, no funding for new loan originations came from our Juzi Licai platform. And all of our funding for new loan origination came from our institution funding partners. The ongoing COVID-19 outbreak has brought and continuing to bring many challenges to our business, but we continue to see a recovery. We believe that with the continued recovery and the determined efforts of our team, we may still be able to achieve our previous stated guidance. Next, Ryan will discuss our credit situation. Ryan, please?

Thank you, Craig. We continued our stable credit performance in this quarter. In spite of a challenging condition in the market, our credit quality continues to be high and there with expected levels, and we fully expect our credit status to continue to perform well and at expected levels. Our 90 days delinquency ratio remains low at 2.99%, and we continue to see stable credit performance, and our lifetime charge-off ratio is approximately 4.5%. This is consistent with our previous statements and the falling within our range of expectations. And we fully expect our stable performance to continue in 2020. With that, I conclude our prepared remarks. Operator, please proceed with the questions-and-answer session.

[Operator Instructions]. Our first question comes from the line of Jacky Zuo from China Renaissance.

So I will help translate. So I have three questions. First one is about our new retail strategy and to be new business model. So can you elaborate more how we differentiate with our peers? And in terms of the new customers, how many -- what is the percentage or contribution of new customers is from Le Card in the new retail strategy? And how much can be converted to our consumer finance customers? And also a number to check in terms of the number of orders, we mentioned in the third quarter, that actually exceeded 1 million daily orders. So what is the definition of that order number? And second question is about our take rates. In terms of the revenue take rate, what is our outlook, essentially considering the increasing platform revenue-sharing model? And we actually see some improvement of take rate in the second quarter versus the first quarter. So what is the trend going forward? And the last one is regarding to our cost item. I observed that the processing and servicing costs actually stay at a relatively high level for the first quarter and second quarter. So what is the trend going forward? Will that be normalized in the future?

So with regards to your first question on the new consumption platform, I think, first, as you know, when we talk about the underlying consumption finance business, a very important part is that we need control or have, if you will, some ideas around the consumption scenario. And these involve both online and offline scenarios. And what we have done in terms of our overall strategy is to have greater control around these scenarios than develop, if you will, a system around this. Now also from these development of scenarios, we're able to get more customers. And this is why you're seeing that our customer acquisition continues to increase, and our total customer numbers now are over 100 million in terms of registered customers. Now in terms of development, originally, as you know, we had our original online consumption platform or e-commerce app. And as others also develop similar products and round out their offerings, we also certainly needed to develop more products. And the second thing was to make, if you will, the availability of cash so that people can send on different things. But more importantly, as you know, is recently the development of Lehua Card, which effectively opens up all the online as well as offline consumption scenarios. And when we open up these scenarios, you can see that the contribution from the customers is better, especially from -- compared to those customers, that purely transacted on a monetary or cash basis. So another way at this provision or the development of the system covering all the consumption scenarios is that it enables us to literally see how our customers eat, sleep, live, et cetera, and therefore, improve the stickiness of the customers. Also it's worth noting that while we have 100 million registered users, the amounts…

Your next question comes from the line of Eddie Leung from Bank of America Merrill Lynch.

So my question is about potential change in policy, wondering what's your thought on the potential impact from the proposed of lowering the APR that can get legal protection at court? And then a follow-up question about that is, what's the percentage of loans with APR under 24%?

So Eddie, we've also seen the reports, obviously, and I think it's fair to say that, ultimately, there is no conclusion, if you will, from any of the government authorities. And then after the article was out, there was certainly a lot of media responses and other things that came out discussing the particular news. And I think a lot of it basically indicated that, well, ultimately, this doesn't really match the situation or the needs in China right now. Now the goal ultimately is to lower the APR to strengthen the economy that we can certainly understand, and it does make sense by itself. But what it will do and how they will do it in a way that makes sense, obviously, we don't know and no one knows yet. Now we did do our own analysis on our underlying business as well, which we can share. We can say that businesses where we're making loans over 24% APR, we don't really have that. We're basically focused on an IRR definition of things. And we're much focused on the 24% IRR. Where we can be over in the most recent quarter, we were at around 26%. Well, when we calculated, if we adhere to some of the calculations stringently, then we might have a 10% reduction in our service fees or revenues. And anybody who is over that, we would cut off, unfortunately, as a customer. But in turn, this is going to reduce our overall risk. So in turn, there may be some benefits to it as well. And if we ultimately go to those type of customers, then under at least the current situation, we can certainly direct these customers to others who would do the business within the new constraints of the rules. And hence, we may be able to earn a referral fee, which would help offset any potential losses.

Our next question comes from the line Alex Ye from UBS.

So I have three questions. The first one is on the asset quality outlook. So we have seen the announcement disclosure that the vintage charge-off rate has continued to remain at around 4.5%. And within our earlier expectation by the management at around 3.5% to 4.5%. So just wondering what is the current expected lifetime loss for the Q1 and Q2 loans that we have just facilitated? And it's on the recent trend of borrowing costs? And in particular, regarding the risk-sharing model, how many institutional funding partners are we working with on this funding -- this specific model? And my last question is just on the sales and marketing expense. We have seen the per customer acquisition costs coming up a little bit in Q2. But overall, still quite stable. So just wondering what would be the outlook for the second half of this year? And what that implies for our overall marketing budget?

Alex, on the overall book, we're probably still looking at 3.5% to 4.5% with the number again, 4.5%, but likely going down over time. For the first quarter and the second quarter, based on the current trends and what we're seeing, we're probably looking at something like 4%. And hopefully, for the third quarter and fourth quarter, these numbers will start to improve. Yes. So on the funding cost in the general direction, as you probably saw our funding cost is now at 7.7%. And so actually, this is a record for us. We never had such low lending costs. And we believe that certainly, it will continue to drop, although maybe in the near future, the rate that it drops slows down a little bit simply because we certainly already have one of the better funding costs and better deals from the banks out there. Now it is also worth emphasizing that for some of this type of model, if you will, in some respects, it's not that important overall to us because what the focus obviously needs to be would be on the profit-sharing model, which we got to about 30% of our funding in the second quarter. And the latest numbers currently were actually at around 40% of our funding is coming from the profit-sharing model. Yes, now it's 40%. Yes. So again, second quarter around 30% and currently at around 40%. And then by year-end, we'll hopefully get to close to 50% or even higher using the profit-sharing model. Now obviously, the model, you can say, definitely, it's more compliant with the regulatory authorities what they would like. It's also a situation where clearly the banks make more money, and they do so by taking out more risk. And the number of the partners that we're…

Our next question comes from the line of Yushen Wang from CLSA.

So I have two questions. First, on APR. We understand that in the second quarter, the APR was down quite a lot. And so even if the interest rate cap potential change does not happen in the future. So we also expect a lower APR down the road due to lower interest rate environment in China? And my second question is on asset quality. I just wonder if management can share with us some details on the D7 delinquency ratio?

Yes. So first, on the APR. I can't say that we would agree with you on saying that the APR had a rapid decrease. We know what you're saying. But we would say that overall, our APR has actually been fairly steady around this range. We've had some fluctuations. But generally speaking, it's been stable and hasn't moved that much. Ultimately, it probably depends much more on customer acquisition and other things going on and the risk of the underlying customers. If we're acquiring higher risk customers, and we'll probably end up with higher APRs. Now that said, long term, yes, we absolutely believe that the APR will decrease because our goal has always been to grow with our customers and to serve better and better our customers over time. So as we do, our underlying customers, credit quality will improve. So as a result, the APR will probably decrease anyway. So on the more, shall we say, shorter delinquency and asset quality numbers. The 7-day number currently is at 2.32%. This is actually a 12-month low. The 1-month collection number, right now, it's actually better than this time last year. In fact, it's better than the Q3, Q4 number last year by something like 20%. So we're actually doing very well right now on the leading numbers. And when we look at the underlying overall asset quality, I think we're increasingly going to levels where we would be very comfortable historically. Now that said, if you look at numbers like the 30-day, the 90-day because these numbers do have a lag, they are higher, and they will be higher. But we think that overall, they peaked at the end of the second quarter or towards the end, and you'll start to see all these numbers improve in the third quarter and fourth quarter.

Our next question comes from the line of Daphne Poon from Citi.

So my question is on the customer acquisition side. So you mentioned earlier that you will spend more efforts on your offline customer acquisition, including the partnership with the consumption scenarios. So just want to understand, first, what is the average customer acquisition cost here? And also, what is the kind of fee model when you're partnering with the merchants? And also, if possible, can you share the contribution from Lehua Card in terms of your new borrowers number in the second quarter?

So on the customer acquisition for the offline, we haven't done some detailed recent analysis on the offline costs. And this is partially due to there's additional investment models, et cetera, being used as well, new employees inherently are cheaper. But it's fair to say that given the numbers that we do have, we're acquiring customers at CNY150, and these are new active borrowing customers. We're very certain that the offline cost is lower than this. Now with regards to how we cooperate, it's definitely not revenue sharing. It's very much using the consumption scenario and providing other potential benefits. So for example, let's say there's a supermarket, and there is some particular deal where someone can buy 30 and get a discount benefit, et cetera, we do this in order to drive customers. And the supermarket, obviously, we get potential new customers as well. So when we do these to membership privilege and benefits, it limits our cost very greatly. And also, as we've seen in our data, it helps us acquire very healthy customers. So it's hard to -- for us to answer right now in terms of the contribution of new customers,that the Lehua Card is making because we can't entirely be sure whether or not it's the product that the new customer came from alone as opposed to the new customer coming to us for other reasons and using the Lehua Card. But what we can say, and I can give you other numbers, is that this is clearly the fastest-growing part of the business, month-on-month growth, it can be as high as 10%. Again, this is month-on-month. It's a core engine for our growth, and it's certainly made up 30% of our new originations.

And last question comes from the line of Cindy Wang from DBS.

So Ryan mentioned about the vintage will be 4% in second half of this year. And could you give some color on whether the vintage improving -- coming from the overall market credit rates are improvement or because our strategy to acquire more good quality borrowers or increased collection, which lead to the overall vintage improved in second half of this year? So my second question is regarding to the provision for credit losses of contingent labilities of guarantee was CNY769 million in second quarter. Could you break down how much provisions come from economic assumption changes and how much comes from the credit deteriorating?

So with regards to the improving credit quality. I think it can only be said that there's many reasons for that, and there's many things working together to bring together that. One, of course, is a improving macro environment. And with an improving macro environment, you will have an improving credit environment, and hence, you have an overall improving environment. Literally the same credit policies in February. If you implemented in February versus you implement, again, the exact same credit policy now, you're actually going to get vastly different numbers, different results and different first payment defaults, et cetera. So that's one aspect of this. Another aspect is that, well, it's always an entire process. It's always a whole process. So something comes in. A particular number default or a particular number, they'll make their first payment. The collections occur, the collections then are tightened, optimized, et cetera. And then from there, then things overall start to improve. So you have all these different factors going up. This is why we feel that by year-end, we should probably looking -- be looking at something like a 4% number. Yes. So on the breakdown, I think, maybe it's best to not think of it that way or to look at it that way directly simply because you do have different things going on, there are different models, whether it's guarantee or derivative. And then there are different assumptions within the different models. So it's definitely not a simple thing. Now that said, it's just like what Ryan said. The overall situation is clearly getting better. So certainly, the underlying assumptions would need to reflect that as well. So you can say that on that basis, certain things are improving, if you will.

There are no further questions at this time. Presenters, you may continue.

Okay. Operator, I think you can close the call then.

All right. Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thank you for participating. You may all disconnect.