Good day, and thank you for standing by. Welcome to the LexinFintech Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Ms. Mandy Dong, Head of IR of Lexin. Please go ahead.

Thank you, Amber. Good morning and good evening, everyone. Welcome to Lexin's second quarter 2024 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are our CEO, Jay Xiao; CRO, Arvin Qiao; and CFO, James Zheng. Before we get started, I'd like to remind you of our safe harbor statement in our earnings press release, which also applies to this call. During the call, we may refer to business outlooks and forward-looking statements, which are based on our current plans, estimates and projections. The actual results may differ materially and we undertake no obligation to update any forward-looking statements. Last, unless otherwise stated, all figures mentioned are in RMB. Jay will first provide an update on our overall performance. Arvin will discuss risk management updates. Lastly, James will cover the financial results in more details. I will now turn the call over to Jay. Please kindly note, different from the past, Jay will give his whole remarks in Chinese. Then, the English version will be delivered via Jay's AI-based voice. Jay, go ahead, please.

[Foreign Language] [Interpreted] Good morning and good evening, everyone. It is my pleasure to share with you our performance for the second quarter of 2024. Amid the current macroeconomic environment and industry landscape, we have adopted a prudent and steady business strategy, adhering to a dual-driven approach of risk management and data analytics. During the quarter, we proactively controlled our loan origination base, tightened credit standards and overall risk levels has been gradually improving with our profitability steadily increasing. In the second quarter, total GMV of loan origination reached RMB51.1 billion. The managed loan balance stood at RMB115.2 billion. Revenue was RMB3.64 billion, an increase of 12.3% quarter-over-quarter. Net profit was RMB230 million, an increase of 12.4% quarter-over-quarter. Based on the probability in the first half of the year, Board of Directors has approved a cash dividend distribution of approximately US$0.072 per ADS, continuing to return values to our shareholders. Next, let me elaborate on our business performance in the second quarter. In terms of risk management, we managed to strike a fine balance between business growth and asset quality, continuously result [Technical Difficulty] existing assets and strengthened our profitability. As a result, asset quality [Technical Difficulty] optimized, specifically for newly issued assets, deeply implemented the effective low and grow strategy, strictly controlled the quality of new assets and increased the proportion of high-quality users. On one hand, we continuously optimized RTA model and bidding strategy of major acquisition channels, resulting in a more than 40% comparative increase in the proportion of high-quality [Technical Difficulty] channels. On the other hand, through the low and grow strategy, we implemented low credit line limit admissions and dynamically adjusted limits based on subsequent user performance. This approach increased the approval rate, while maintaining risk exposures. We utilized differentiated pricing, credit score and other…

[Foreign Language] [Interpreted] Thanks, Jay. Let me give an update regarding risk performance in the second quarter. [Foreign Language] [Interpreted] In the second quarter, we continued to adhere to the strategic principle of risk management upgrade and profitability improvement, consistently enhancing our risk management system and risk management capability. By strengthening our risk identification capability, building a full lifecycle risk management strategy system, upgrading our risk monitoring and risk detecting capabilities, developing strategy robots to promptly handle risk alerts and implementing refined risk management for new and existing customers, as well as existing assets, we achieved a gradual reduction in risk levels for both newly issued and the total assets in Q2. Specifically, the FPD7 rate for new assets in the second quarter decreased by approximately 14% compared to the first quarter. Day one delinquency rate for total assets at the end of the second quarter decreased by about 7% compared to the beginning of the quarter. And 30-days collection rate has gradually improved, up by about 1.5 in absolute value from the start of the quarter. We anticipate that the downward trends in risk levels will continue in the second half of the year. [Foreign Language] [Interpreted] Let me elaborate on various measures we have implemented in Q2. On the data front, we have intensified the introduction of high-quality scenario-based data source and customized in-depth joint modeling. We have also phased out and replaced ineffective third-party data source, thereby laying a solid data foundation for risk management. [Foreign Language] [Interpreted] On the front of model system development, we have completed the optimization and upgrade of risk assessment models for various business lines. First, we continued to introduce new partners with proprietary ecosystem data, enriching the underlying data dimension. Second, we consistently optimized samples by [detecting] (ph) those that are…

Thank you, Arvin. I will now give a more detailed update on our financial results. Please note that all figures are presented in RMB, unless otherwise stated. As Jay and Arvin mentioned, in the second quarter, the macroeconomic recovery remained sluggish. The consumer confidence continued to be at historical lows. In this context, we maintained a cautious operating strategy, controlling the pace of loan issuers and further tightening credit standards. This timely adjustment strategy not only brought us healthy financial results, but also laid a solid foundation for future growth. The strong financial performance in the second quarter can be highlighted in the following four aspects. First, significant increase in revenue take rate. This is the key highlight of the quarter. The revenue take rate of credit business rose to 2.91%, an increase of 37 basis points quarter-over-quarter and 54 basis points quarter-over-quarter. Despite a 12% quarter-over-quarter decline and a 20.1% year-over-year decline in quarterly loan issuers, we achieved a 12.3% quarter-over-quarter and a 19.1% year-over-year revenue growth. The increase in take rate was primarily driven by record low funding costs, risk based differentiated pricing optimization, a slight refinement in the early repayment ratio and a continued improvement in asset quality of new loans. Arvin has detailed the downward trend in risks of new assets, and we're confident that we will see more improvement in the overall loan portfolio towards later this year. Secondly, record low funding costs and more balanced funding channels. In the second quarter, funding costs further declined to 5.26%, down 58 basis points quarter-over-quarter and 131 basis points year-over-year. This significant drop in funding cost was due to a relaxed monetary policy environment and an increased market demand for high-quality assets from our platform and efficiency improvement brought by diversified funding sources. We successfully resumed ABS…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Yada Li from CICC. Please ask your question, Yada.

[Foreign Language] Well then, I'll do the translation. Hello, management. Thank you for taking my questions. Mr. Jay mentioned that the growth of the overseas business this quarter far outpaced overall business. Could you provide more details on the overseas expansion and when we expect the overseas business to scale up in volume and make a profit? Second, the management mentioned that the company continued a prudent strategy this quarter, but we noticed that sales and marketing expenses increased compared to the first quarter, which means the customer acquisition cost per active user also went up if we do the calculation. Could management give more color on this? That's all. Thank you.

[Foreign Language] Okay. I will translate for Jay. [Interpreted] In Q2, amid tepid macroeconomic recovery, we adopted a prudent strategy in the domestic market, further tightening our risk approval standards and maintaining a healthy controlled scale of loan origination. Compared to our domestic market, our overseas business has developed rapidly. You see, total loan origination in Q2 grew by 60.8% and the loan balance increased by 76.8% Q-on-Q, far outpacing our overall business growth. Furthermore, the overseas business is accelerating, growing speed quarter-by-quarter. The Q-on-Q growth in Q2 is roughly 2 times to 3 times of that in Q1. However, we'd like to also point out that the scale of our overseas business is still relatively small compared to our domestic business scale. We anticipate that it still will take some time and require more investment to expand and subsequently make a profit in the future for the overseas business. So looking forward, we plan to step up our investment in overseas market and accelerate the expansion. [Foreign Language] Well, I will do translation for Jay. [Interpreted] Yeah, now for your question, explaining in short, the majority of the incremental sales and marketing expense comes from our investment in overseas markets. The overseas market, as you see, is still in its early stage of high growth rate, and it requires significant investment. Therefore, if you just purely do the calculation based on the financial statement, it may appear to show that the customer acquisition cost per active user went up, but that is misleading. Based on our detailed analysis, the total cost related to acquiring new customers in the domestic market and also if we see the unit cost of customer acquisition remains relatively stable compared to Q1, and that's within our expectation. Moreover, as we continue to improve our customer acquisition efficiency in the domestic market in the future, we believe the quality of our customer cohort will improve and the payback period will shorten and the unit cost per customer will gradually go down.

Operator, that answers the two questions of Yada. We can go ahead for the next questions.

Thank you. Our next question comes from Zoe Zou from CLSA. Please go ahead, Zoe.

[Foreign Language] Okay. Let me do the translation. First one, as James mentioned, although the loan volume decreased this quarter, revenue increased quarter-over-quarter, which implies a significant rise in the revenue take rate. Could the management elaborate on the driving factor behind this and provide an outlook on the future trend of the revenue take rate? The second question, both CEO and CFO mentioned a significant reduction in funding cost this quarter. Could you elaborate on the specific measures taken to bring down funding cost and share management's outlook on the trending of funding cost for the third quarter and the rest of 2024? Thank you.

Thank you, Zoe. I will answer your questions. The first question, basically, in Q2, because of the slow recovery of the macro economy, we continue to adopt a prudent strategy. Basically, the total loan origination declined by 12%, and the loan balance dropped by about 5% quarter-over-quarter. However, because of our focus on improving the operational efficiency and strengthened core capabilities, the revenue take rate increased significantly from 2.54% in Q1 to 2.91%. Basically, it's a substantial rise of 37 basis points quarter-over-quarter and about 54 basis point if you compare year-over-year. This is really because of many reasons. Basically, the first one is, as Arvin mentioned, tightened risk standards boasted a continuous improvement in the quality of new loans this quarter. And also secondly, a significant reduction in the funding cost. And thirdly, some further optimizations of early repayment ratio, a risk-based differentiated pricing and more value-added services. Looking ahead into the third quarter, we will continue to uphold the prudent operational strategy, and we expect the revenue take rate to maintain a slight uptick momentum in the near future. As for the second question related to funding cost, basically, this quarter, the funding cost reached a new record low, stood at about 5.26%. It decreased by 58 basis point quarter-over-quarter. It is a really big reduction. Really, this is driven by many factors. The first is the overall liquidity in the market. It remains relatively ample, and our quality assets are in high demand amongst the trending -- funding partners. So, this reflects our continuously improving asset quality has gained more recognition from funding partners. Really, this helps us to drive down the funding cost. Secondly, as for our profit-sharing model, the revenue split ratio increased by 1 percentage point quarter-over-quarter and 4 percentage point year-over-year. Again, this demonstrates the competitiveness of our assets and our strong bargaining power, if you will. And the third point is the continuous ABS issuers. As Jay and I both talked about in our script, we issued two tranches of ABS with the senior tranche as low as 2.8%. This really significantly pull down our funding cost. And we plan to regularly issue ABS to further balance and diversify our funding channels. And in terms of funding structure, in Q2, we added two more funding partners to our existing 160 partners network. So, with the proportion of funds from national funding partners maintaining at about 70% or so. So, looking ahead, with the acceleration pace of the ABS assurance and continuous improvement in asset quality, if the overall liquidity remains sufficient in the financial market, we believe there is still considerable room for further reduction in funding cost in the near future. So hopefully, this answers your questions.

Thank you. Our next question comes from the line of Alex Ye from UBS. Please ask your question, Alex.

[Foreign Language] So, I have two questions on asset quality. First is on, so, after we have seen some early signs of asset quality improvement in both new loans and the overall portfolio, so when do we expect this improvement to be reflect in bottom-line more meaningfully in the future? And second question, regarding some of the risk indicators. For example, number one, the 90-days-plus NPL ratio has continued to edge up to 3.7% in Q2. So, I'm wondering when do we sort of expect to see this kicking. And then, also, on the [data still] (ph) 30-days vintage curve, we have noted the Q1 curve still following the similar trajectory of the past few quarters. Wondering when do we see an improvement to that? Thank you.

[Foreign Language] Well, I'll translate for Arvin. [Interpreted] As we continue to enhance risk management upgrading, we will further strengthen the risk identification capability, advance the construction of comprehensive lifecycle risk management strategy system, improve risk monitoring and early alerting capability and develop intelligent risk tools, such as we mentioned before, the strategy robot. We will continuously enhance the refined risk management for both new and existing customers as well as the existing assets. So, based on the above mentioned measures undertaken, we anticipate that a proportion of new loan will gradually increase and the risk level of the existing assets will gradually come down, leading to a gradual improvement in profitability in the future. We expect this to show as a gradual quarterly improvement over time. [Foreign Language] So, I will translate for Arvin. [Interpreted] As you mentioned, 90-days delinquency rate is more like lagging indicator. We strongly suggest that the market pay more attention to those leading risk indicators that we actually monitor in the daily world of our risk management space. For example, we mentioned a few of them, the FPD7 were new issued assets. In Q2, we see it dropped by approximately 14% compared to Q1. The second lead indicator will be day one delinquency rate for the total assets. You see, it's dropped about 7% from the peak time in April to June in the second quarter. The third lead indicator we recommend to witness the M1 collection rate, which gradually improved about approximately 1.5%. That's in absolute value from April to June. So, all the risk improvements in the new issued assets will gradually show in the 90-days, gradually [by in time] (ph). It will require some time to until we see the improvement in the 90-days delinquency rate. Second point, I'd like to explain from the mathematic calculation perspective to elaborate the increase of 90-days delinquency rate is, the 90-days delinquency rate, the denominator is the loan balance. As we mentioned, we actively [restrained] (ph) our loan origination in Q2. That resulted in a decrease in loan balance. So, there is a drop in the denominator. When we calculate 90-days delinquency, it naturally leads to a rise in the 90-days delinquency rate. As all the upgrade in the risk management work continues, we expect to see the downward trend when the risk level will continue in the second half of the year.

Well, Alex, hope that addressed your question regarding the risk management space. Operator, I think, if there's no more questions on the line, I think we can close the call.

Thank you. I'm showing no further questions. I'll now turn the conference back to the management team for closing comments.

Well, thank you, again, everyone for joining us today. If you have further questions, please feel free to contact us via the contact information on our IR website. Thank you all. Have a good day and good night.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.