Good day, and thank you for standing by. Welcome to LexinFintech Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to your first speaker today, Ms. Mandy Dong. Thank you. Please go ahead.

Thank you, Desmond. Good morning, and good evening, everyone. Welcome to Lexin's Third 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 outlook 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 statements in more detail. I will now turn the call over to Jay. Please kindly note, in today's agenda, 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.

Good morning, and good evening, everyone. It is my pleasure to share with you our performance for the third quarter of 2024. In the third quarter, we remain committed to a prudent and steady operational strategy driven by risk management upgrade and deep data analytics. This approach has allowed us to reduce our overall portfolio's risk and improve our asset quality. As low-risk new loans continue to grow, our overall asset structure is gradually improving. In the third quarter, loan originations reached RMB 51 billion. Outstanding loan balance stood at RMB 111.3 billion. Revenue was RMB 3.7 billion, and net profit was RMB 310 billion, with both revenue and net profit returning to a steady growth trajectory. As the fundamental of our portfolio continue to strengthen, we expect to see further improvements in the company's revenue and net profit in the future. Our performance in the third quarter includes the following 2 highlights. First, our ongoing efforts in risk management have yielded tangible results with continued improvement in new asset quality and a turning point in overall portfolio risk. The leading risk indicator, FPD7 of new loans decreased by about 13% compared to the second quarter, and day 1 delinquency ratio of the overall portfolio declined by around 9% compared to the previous quarter. During the quarter, we focused on expanding high-quality new loans by fully implementing the loan growth strategy on various business lines, supported by the following measures. We strengthened our reach and acquisition of target customer markets by optimizing key online advertising channels, leveraging our cumulative user base of over 200 million registered users. We explored their potential borrowing demands and conducted targeted reoffer to reactivate dormant high-quality customers. We brought in multiple third-party data sources and developed a dedicated risk model for small and micro business…

This is translation of CRO's remarks. In the first quarter, we continued to adhere to the strategy of tightened risk standard and profitability enhancement, focused on generating more high-quality assets and improve the accuracy and efficiency of high-risk asset control. We also upgraded the real-time anti-fraud detection capability, further refined the third-party data management system and build a real-time interactive risk management capability. Leading risk indicators for new assets and the overall assets continued the downward trend from the previous quarter. FPD7 of new assets decreased by about 13% compared to the second quarter and the overall asset day 1 delinquency rate decreased by about 9% compared to the second quarter. We expect this downward trend of leading risk indicators will continue in the fourth quarter. Specifically, in terms of risk management for new assets from new customers, we have made significant progress in both new customer acquisition through online advertising channels and activating dormant customers on Lexin's existing user base. In terms of new customer acquisition through online advertising channels, we have focused on key high-quality channels and accelerating phasing out long-tail high-risk channels. Meanwhile, we have continuously strengthened our risk identification capabilities and upgraded risk strategies for new customers, resulting in a stable decline in the risk level of new customers acquired through online advertising channel. Compared to the second quarter, the risk level of new customers acquired through this channel has decreased by 10%. By the end of the third quarter, leading indicator FPD7 for new customers have significantly decreased by about 50% compared to its peak in Q4 last year. Currently, the risk level of new customers acquired through online advertising channel has generally declined to a reasonable range. In terms of reactivation and conversion of dormant customers, we have deeply explored the borrowing needs of…

This is James. Now it's my turn. Thank you, Arvin. I will now give a more detailed update on our financial results, noting that all figures are presented in RMB, unless stated otherwise. During the past quarter, we adhered to our principles of prudent operation and continued the upgrading of our risk management capabilities and the transformation of overall business. Our efforts yielded satisfying results, evidenced by stable loan origination volume and a strong [indiscernible] growth. Total revenue amounted to approximately RMB 3.7 billion, remaining steady compared to Q2. Net profit showed a significant growth, increasing by 36.7% quarter-over-quarter to reach RMB 310 million. Here are 3 key highlights explaining our robust financial performance. First, substantial profit increase driven by higher revenue take rate. The sharp increase in net profit was primarily driven by higher take rate, which reached a record high of 3.25%, up by 35 basis points from 2.91% of Q2 and 81 basis points from 2.44% of the same quarter last year. The take rate calculation is derived by adding credit-oriented income and the tech empowerment income, subtracting funding costs and the various provisions, then dividing by new loan origination volumes for the quarter. A few core drivers supported this increase, including the following. One, the continued improvement in the risk level of new loans in Q3, evidenced by FPD7, which decreased by about 13% from Q2. Two, a new record low in funding cost of 4.28%, which fell by nearly 100 basis points from Q2 of 5.26% and 6.36% of the same quarter a year ago. We achieved this through ample funding and partnerships with cost-efficient national financial institutions. It also underscores the increasing confidence of our funding partners in our assets. Three, continued optimization of user loan early payoff ratio and the revenue from some…

[Operator Instructions] First questions will come from the line of Yada Li from CICC.

[Foreign Language] Then now I do the translation. Congrats to the exciting results. My first one is, what's management view on the growth strategy for the fourth quarter following the rollout of government policy stimulus at the end of September? And can we see signs of consumer loans demand recovery based on the current operational data? And secondly, what's the core drivers for the significant net profit growth this quarter? And will this growing momentum of net profit continue in the following quarters?

[Foreign Language]

This is Mandy. Let me translate for Jay.

Well, since the government rolled out the economic stimulus measures at end of September, we did observe some positive change in the short-term demand. However, whether it will turn into a long-term sustainable recovery still depends on the ongoing improvement in the macroeconomic environment in the future. So based on the quarter-to-date Q4 operational data, we see that total volume loan origination is generally flattish compared to the same period in Q3. We think this is due to our continued prudent operational strategy. We focus on maintain asset quality, especially control the higher risk part. Therefore, there hasn't been a significant growth in the overall loan origination volume. Well, although the total volume remained roughly at the same level, there has been a continuous optimization in our asset structure. We have seen a slight increase of the high-quality customer with consistent recovery and enhancement in the high-quality demand. At the same time, we are proactively promoting the growth of high-quality assets, continuing to increase the portion of high-quality assets and improve overall asset quality. Additionally, our recent upgrade in the customer acquisition strategy has proved to be effective. So we are actively deploying for the growth of new customers, we think which would lay a solid foundation for our growth next year.

Okay. Yes, Let me -- this is James. Let me answer your second question. Basically, the second question is give little more details in terms of our net profit for this quarter and also the forecast for next. In Q3, the net profit reached approximately about RMB 310 million. It is a very significant quarter-over-quarter growth of 36.7%. Really, the growth is attributed to the company's continued focus on strengthening our core competencies, especially in risk management, the continuous optimization of overall operations over the past 2 years. Specifically, really two drivers. The first one is the improvement in asset quality, as both Jay and as Arvin mentioned a few times. Basically, we’re benefiting from the strategic focus on the risk management – overall upgrade, new asset quality continued to optimize in Q3. The overall quality in Q3, actually in terms of asset quality, it really reached a turning point, beginning to stabilize and recover as the batch of loans with higher risks that we issued in second half of last year gradually mature. So based on our preliminary estimate, we would expect a considerable growth in net profit next year on a year-over-year basis. Obviously, as you know, we’re going to provide guidance for next year after we report our Q4 numbers. In this quarter, the FPD7 for the new assets decreased by approximately 13% quarter-over-quarter and the day 1 delinquency rate for the total assets decreased by about 9% in comparison with the second quarter. We would expect this downward trend of risk level continue in fourth quarter and into next year as well. So basically, that’s the first driver in the profit improvement. The second driver really is the record low funding cost. It's really driven by the ample market liquidity and a strong demand for the…

Our next questions comes from Yuying Zou from CLSA.

[Foreign Language] Let me do the translation. The first question, management mentioned that it was -- the risk level of new loan has been continuously optimized quarter-over-quarter and overall asset quality has also improved compared to Q2. Could you elaborate on the main measures taken in Q3 to optimize the risk level of new loans and provide an outlook on the expected progress of the overall asset quality recovery in the future? And the second question is about the newly launched Intelligent Credit Platform model. Could you elaborate more on the future plan on this new business line and its impact on the company's business scale and profitability?

[Foreign Language]

Let me translate for Arvin.

So in Q3, regarding the key areas in risk management space, we primarily focused on improving several assets: one, risk identification; two, risk decision-making; three, risk pricing; four, different risk-bearing model. Firstly, for the new customer acquired through the online advertising channels, we put efforts in -- below 4 measures. Number one, we focus on the high-quality channels and accelerated the phasing out of long-tail high-risk channel. Secondly, we put efforts to build joint models with the leading platforms with scenario data. Number three, we enhanced our anti-fraud detection capability. Number four, we expand our low and grow strategy to the all business lines. As a result, we have continuously strengthened our risk identification capability and upgraded risk strategy for our new customers, resulting in a stable decline in the risk level of new customers in this channel. So compared to Q2, the risk level has decreased by 10%. By the end of Q3, leading indicator FPD7 for new customer has significantly decreased approximately by 50% compared to the peak level in Q4 last year. At the same time, we are able to uplift to some extent in the approval rate in order to promote the growth of high-quality loans for our new customers. So we expect the risk level of new customers acquired through the online advertising channel to catch up with the leading platform in the industry by the end of 2024. Regarding the latter part of your question, for the overall asset quality recovery progress, the day 1 delinquency rate of the total assets decreased by 9% in Q3 compared to Q2. We estimate this downward trend will continue in Q4. So based on our continued advancement of the overall risk management upgrade efforts, we are confident that with the ongoing optimization of asset structure, namely, we will reduce the portion of delinquent assets and promote the generation of high-quality assets. Well, according to our scheduled progression with the risk management initiatives, we expect to see a significant increase in our net profit in 2025. Hope that answers your questions, Zou.

[Foreign Language]

Let me translate for Jay's comments.

Well, thanks to our continued effort to strengthen the internal capability, especially the risk management capability, we have been able to upgrade the risk identification capability that enabled us to conduct a more precise customer segmentation and launch the new model, ICP, short for Intelligent Credit Platform model. ICP is a capital-light profit-sharing model where Lexin does not bear the risk of principal loss. The new model expands our addressable market while smooth the potential risk fluctuation across credit cycle. Through the ICP model, we can identify customers with different risk levels more precisely, provide more accurate segmentation and differentiated pricing, then distribute these assets to financial institutions with corresponding and complementary risk appetite. This approach allow us to offer customer longer life cycle service, thereby generating more sustainable revenue from technology service. Well, although the ICP model just got launched in Q3 and only accounts for a very small portion of our total loan volume currently, we believe this business line is crucial to adjusting our overall asset structure and turn our business model into a more sustainable one. We believe ICP model still has a significant growth potential. We will continue to make product mix adjustment through expanding this model. Zou, hope this address your question.

The next questions comes from the line of [Yufeng Chan] from Huatai Securities.

Okay. Let me do the translation. I have 3 questions. The first one is, we noticed management also mentioned that the funding cost hit a new record low this quarter. Could you elaborate on the driving factors behind this and provide an outlook on funding cost for Q4? And the second one is, in Q3, unit customer acquisition cost significantly decreased and the number of new approved credit line customers increased substantially quarter-on-quarter. Could you introduce the main measures taken and whether the customer acquisition cost will continue to drop in the future?

Okay. I will take the first question [indiscernible] Funding cost decreased by approximately 100 basis points to 4.28% in comparison with Q2. This really marks the 11th consecutive quarter of reducing funding cost since Q1 of 2022, reaching a new historic low and achieving the largest quarterly reduction. For the fourth quarter, given that we're already at a historic low funding cost and also considering there is a kind of a seasonality of tightened funding typically before the end of the year, right, for financial institutions, so we anticipate a relatively milder optimizations in funding cost for Q4. Looking ahead to 2025, with the continued implementation of easing money policies supporting the macroeconomic recovery and more recognition from the funding partners as our asset quality continues to improve, so we have confidence that we will continue to optimize the funding cost and enhance our overall profitability next year.

[Foreign Language]

Let me translate for Jay's comments.

So regarding your question about the cost of customer acquisition, the reduction of this is mainly attributable to several measures. Number one, we have significantly improved our capability and efficiency in customer acquisition through the online advertising channel on a quarter-over-quarter basis. Unit cost of users with approved credit line dropped by 24% Q-on-Q and the number of users with approved credit line increased by 22%. As for the portion of good quality and high potential users, total number with approved credit line rose by 34% and the total amount of the credit drawdown increased by 30%. Meanwhile, we are able to draw down the unit cost acquisition of good quality users by 40%. As a result, the risk level of new customers dropped by 10% compared to Q2. Moreover, the proportion of good quality users continue to hike and the payback period got shortened. We believe with the strengthened customer acquisition capability, we will probably increase investment in customer acquisition front in the future in order to lay a foundation for the business growth next year. The second measure, we have intensified efforts to activate and convert dormant customers. Over the past 11 years, Lexin has accumulated a large user base, roughly more than 200 million users. In the future, we will continue to refine the operations in order to provide more accurate credit line granting and the loan pricing for customers to activate dormant customers. In Q3, the total number of reactive dormant customers nearly doubled compared to Q2 with the credit line drawdown rate of the approved customer increased by 47% comparatively in the [indiscernible]. Moreover, the customer acquisition cost for the reactive state customer is low and the risk level is about 20% lower than that of the new customer from online advertising channel. Therefore, in Q4, we will continue to intensify efforts to reactivate and convert existing customers in order to sustain the growth of new customers at low cost and low risk. For the third front, we have further strengthened our cooperation with the KA – leading KA channels in Q3. By far, the volume growth and the profitability looks good. We will continue to increase the investment in this channel in the future. I hope this addressed your question, [Yufeng]. Operator, can you check if there is more questions on the line?

There are no more questions on the line. Please continue.

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

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.