Good day, and thank you for standing by. Welcome to LexinFintech Fourth 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 would now like to hand the call over to your host today, Mr. Will Tan. Please go ahead.

Thank you, operator. Hello, everyone. Welcome to our fourth quarter 2024 earnings conference call. Our results were released earlier today and are currently available on our IR website. Today, you will hear from our Chairman and CEO, Mr. Jay Wenjie Xiao, who will provide an update on our overall performance and strategies. Our CRO, Mr. Arvin Zhanwen Qiao, will then provide more details on our risk management initiatives and updates. Lastly, our CFO, Mr. James Zheng, will discuss our financial performance. 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 do not assume any obligations to update any forward-looking statements, except as required under applicable laws. Last, please note that all figures are presented in RMB terms and all comparisons are made on quarter-over-quarter basis, unless otherwise stated. Please kindly note, that Jay and Arvin will give their whole remarks in Chinese first, then the English version will be delivered by Jay's and Arvin's AI-based voices. With that, I'm now pleased to turn over the call to Mr. Jay Wenjie Xiao, Chairman and CEO of Lexin. Please.

Thanks for joining us today for our fourth quarter 2024 earnings call. In the fourth quarter, we maintained a prudent operating strategy, focusing on expanding high-quality assets and optimizing profitability. Driven by enhanced risk management system and advanced data analytics capabilities, we further reduced overall portfolio risk and delivered consistent profit growth. As of quarter end, our outstanding loan balance stood at RMB110 billion. During the fourth quarter, our GMV was RMB52 billion. Revenue was RMB3.7 billion, and non-GAAP profit was RMB390 million. Performance has been improving for multiple consecutive quarters and both revenue and profit have entered a clear growth trajectory. Now, I'd like to share a few key highlights of our fourth quarter performance. First, new loans facilitated have consistently maintained high quality, resulting in a continued decline in overall portfolio risk and sequentially improving profitability. Compared to the third quarter, leading risk indicators for new loans, first payment default, FPD over seven days improved by 8% and FPD over 30 days decreased by about 9%. On total loan portfolio, day one delinquency ratio decreased by 4%, 90 days delinquency ratio decreased by 3%. The improvement in risk performance is primarily attributed to our long-term and continuous investment in risk identification, capabilities and risk management tools. In terms of risk identification capabilities, we introduced multi-dimensional third-party data, developed tailored data systems and identification models for segmented customer groups, strengthened real-time user risk identification and leveraged the latest big model technology to improve model stability. As a result, the accuracy of risk identification improved by 15% compared to the previous quarter, while stability improved by 10%. On the risk management tools front, we established a risk control laboratory for intelligent risk testing in the fourth quarter, creating a new paradigm of small-scale experiments. AB testing, long-term observations and dynamic…

Thanks, Jay. Next, I will provide a review of our key initiatives and achievements in risk management for the fourth quarter. In the fourth quarter, we remained committed to our strategy of prioritizing asset quality focusing on scale stability and profitability enhancement through three key initiatives and have achieved solid results. Compared to the third quarter leading risk indicators for new loans, first payment default, FPD, over seven days declined by about 8% in the fourth quarter. On total loan portfolio, day one delinquency ratio decreased by 4% and 90 days delinquency ratio decreased by 3% quarter-over-quarter. The continued decline in risks was achieved by the following key initiatives we've taken. First, to enhance the accuracy and stability of risk identification, we have introduced new high-quality data sources while conducting deeper data mining and joint modeling with our existing core data sources to improve model performance. At the same time, we have ramped up the development of dedicated scoring models for different business lines, products and customer segments. Compared to general models, dedicated models use more targeted modeling samples, which significantly improve prediction accuracy. In terms of model stability, we have addressed uncertainties in model predictions caused by factors such as missing data and noise by employing algorithms to quantify the specific uncertainties, thereby enhancing prediction stability. These optimization measures have led to about a 15% improvement in risk identification accuracy and a 10% increase in model stability. Second, we have upgraded our credit line management capabilities by adopting the test-and-learn approach. Leveraging our strategy laboratory, we conducted credit line experiments across different customer segments to identify the optimal fit among credit line, borrower risk and user conversion. This approach has enabled us to optimize credit lines for various user groups, improve the accuracy of credit allocation and balanced business…

Thanks, Arvin. I will now provide a detailed overview of our fourth quarter financial results. Please note that all comparisons are made on a quarter-over-quarter basis unless otherwise stated. In the fourth quarter, we advanced our business transformation efforts maintaining a prudent operating strategy, while strengthening our risk management framework and driving business optimization. We are pleased to report the key performance metrics continued their upward trend from the third quarter aligning with our expectations and delivering steady growth. These results underscore the effectiveness of our strategic directions and highlight the progress we've made in executing our initiatives. During the quarter, driven by a decline in credit cost, including the provisions and fair-value changes of financial guaranteed derivatives, our net income increased by 17% to RMB363 million, even though the total GMV remained relatively stable. Net income increased by 54% compared to net income adjusted for the investment losses in the same period of last year. The net income take rate calculated as the net income divided by the average loan balance increased from 1.09% in the third quarter to 1.31% in the fourth quarter advancing by 22 basis points, well on track of our profit margin expansion roadmap. Before delving into the financial line items, I would like to share some highlights that contributed to this sustainable and in-line growth result. First, there is an increased overall take rate due to the continued asset quality improvement. In the fourth quarter, we achieved revenue take rate of 6.22%, a 36 basis improvement from 5.86% in third quarter. Even though the overall APR charged to users actually decreased by more than 100 basis point, as we focused more on high-quality customers. The weighted average APR for loans now stands at 23.88%. This take rate was calculated as the sum of revenue…

[Operator Instructions] Our first question comes from the line of [Yuheng Wang] from Goldman Sachs. Please go ahead.

I will translate my question. The first question is, what's our business plans for 2025? And the second is what is our AI-related business layout and the specific applications of AI technologies such as DeepSeek and what are our future plans about AI? Thank you.

Let me translate for Jay. Thank you, Yuheng. In 2025, our strategy remains prioritizing asset quality, focusing on profitability enhancement. With our priority on asset quality, we aim to profitability enhancement and scale stability. In terms of risk, we will continue to upgrade our risk management system. The new loans we facilitated this quarter, credit performance is in line with our expectation and we will drive the continuous decline of key risk indicators in the future. In terms of profitability, we are committed to driving significant growth in net income by leveraging continuous enhancement in risk performance, optimized funding structures and costs and improved operational efficiency. In terms of scale, our goal is to achieve stable growth by improve efficiency of customer acquisition through our high-quality client engagement and enhanced synergies with our partners and platforms, offline inclusive finance and e-commerce business. We also will increase our investment in customer acquisition this year to further enhance the -- improve the efficiency of customer acquisition. Despite the overall positive momentum, our performance may experience volatilities due to macroeconomic headwinds and seasonality fluctuations. We will adjust our growth strategies in real-time based on the evolving environment.

Let me translate. As reported, Lexin is one of the first financial platforms in China to implement a DeepSeek model. Following the deployment of DeepSeek V2 in May 2023, Lexin have recently upgraded to DeepSeek R1. By leveraging over a decade of industry expertise and data accumulation, we have conducted the pretraining and localized deployment on DeepSeek and developed Singularity AI, our own financial large model. We have deeply applied AI technology to improve research and development efficiency and boost tour innovation and business enablement. Our large model has been fully deployed in core operation workflows, including telemarketing, customer service and collections. Through continuous optimization of dialogue flow trades and user conversion, we have demonstrated substantial improvement in both operation efficiency and customer experience. Also, we applied this advanced technology into our collection process. As Arvin just mentioned, we use this to improve the collection efficiency for delinquency customers. In the future, we will strategically intensify technology investment with a primary focus on advancing deployment of DeepSeek R1. We will implement comprehensive process optimization across all business segments, explore its application in key areas of risk management and leverage technology to further enhance our risk management capabilities. Thanks, Yuheng. Operator?

Thank you for the questions. One moment for the next question. Our next question comes from Alex Ye from UBS. Please go ahead.

I will translate for my question. So first question is about the Company's ongoing investment in your risk management capabilities. Can you share with us some more color in terms of the latest progress on the achievement you have made and especially what's the current gap or differences versus your peers? Second question, it's about the outlook for your risk management metrics. So what are the main targets that you aim to achieve in this year and which are some of the most important indicators that you would suggest investors to track? Thank you.

Let me translate. Overall, we achieved significant improvement of risk management capability for this quarter. Overall, our risk management capability has reached industry level and in specific technology -- technical aspects, we are already at the industry-leading position. We have comprehensively restructured and upgraded key risk management process, including risk identification, decision-making, risk pricing and post-loan management. These enhancements have significantly improved the accuracy and stability of our risk management system. Meanwhile, we have upgraded our decision-making methodologies such as test-and-learn and low-end growth frameworks for credit line and pricing decisions. And we also improved our risk tools such as dedicated risk control laboratories and risk robots to validate and support our key risk decisions. As a result, our key risk indicators, including 90 days delinquency ratio and FPD 30 days ratio have improved for two consecutive quarters, which underscore the tangible benefits yielded by our risk management transformation efforts. Despite these achievements, our overall performance still has some gaps compared to our peers, mainly dragged by legacy loans. However, as the proportion of high-quality new loan increases and the decrease of legacy loan, we expect the overall portfolio quality to further improve. Our goal is still to prioritizing asset quality, focusing on scale stability and profit enhancement. Building upon the established risk framework, we will further optimize it as follows. In terms of risk detection, we will optimize asset structure by increasing the inflow of high-quality customers. Also, we will refine our collection strategy through differentiation and intelligent collection tools, ensure a continuous decline in risks for both new loan and loan balance. In terms of scale, by enhancing specialized customer acquisition capabilities across all channels and improving offer competitiveness, we will drive the inflow of high-quality new customers, activate potential customers and expand credit admission through our e-commerce…

Thank you for the questions. The final question comes from the line of Yada Li from CICC. Please go ahead.

Then I'll do the translation.

Okay. I will. Go ahead. Yada, go ahead.

Okay. Then I'll do the translation. So first of all, could you elaborate more about the trend of unit economics and the main drivers? Second, I was wondering how to view the OpEx in 2025, especially in sales and marketing expenses, will the Company become more active in customer acquisition in the following quarters? And the last, do you expect to deliver more value to the shareholders, and any further plans? That's all. Thank you.

Okay. I will take the first two questions and then ask Jay to answer the third question. First, in terms of the user economics, as we have been communicating with the market, if you look at the net profit margin of the Company, it is calculated as the net income divided by the average loan balance. It will increase significantly to reach the industry average level in the next two years. Obviously, the primary driver for the asset -- is the asset quality improvement, particularly for the new loans issued since the second half of last year. As an example, in Q4, if you look at the provisions, it was reduced about by 5% compared to the previous quarter. So, as you know, the total loan portfolio is a mix of the old legacy loans and better quality new loans. As we have more better quality new loans, and the old loans will mature and lapse, therefore, the overall asset quality will continue to improve, which will lead to sustained profitability improvement or net profit margin expansion. Other factor obviously contributing to the improved profitability is the reduction in the funding cost. As our asset quality continues to improve, our assets receives more acceptance from the financial institution partners and the funding costs were declined accordingly. So as a demonstration of the -- our profitability improvement, we can take a look in the net profit margin in the last four quarters in 2024. It started from 0.66% in Q1, 0.77% in Q2, 1.09% in Q3, and 1.31% in Q4. So we expect the net profit margin to continue to sequentially improve in the next two years to eventually reach the industry average level. One reminder, of course, is that we may experience certain fluctuations in the degree of the profit margin improvement from quarter to quarter, due to the impacts of seasonality, accounting rules or any other timing factors. But we are very confident the overall net margin expansion trajectory will not change. As for the second part of the question, the OpEx, basically to continue to support the user acquisition and the business growth, i.e., the expanding new marketing channels, upgrading risk control systems, hiring top talents and increasing AI technology investment, we do expect the absolute amount of the Company's operating expenses to increase in 2025, although it will be at a slower pace than the overall company profitability improvement. The operational efficiency improvement is another factor that contributes to the margin expansion. So we will continue to work hard to balance the need of investing for the future and also the need to sustain the sequential profitability improvement. So that's the answer, if you will, for the first two questions, and the last one is for Jay.

Let me translate. As we announced previously, our cash dividend payout will be raised to 25% of net income effective from January 1st this year. The dividend will be announced in August when we disclose our second quarter results. We are committed to returning values to our shareholders. This year is our business and financial result turnover year. We expect our net income will increase significantly in 2025. And we are open to increase the cash dividend payout ratio as appropriate to align with shareholders' expectations. Thanks. Operator?

Thank you for the questions. We have no more questions from the line. I would like to hand the call back to management for closing.

Thank you. This conference is now concluded. Thank you for joining today's call. If you have any more questions, please do not hesitate to contact us. Thanks again.

That does conclude today's conference call. You may now disconnect.