Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech Second Quarter 2021 Earnings Conference Call. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Mandy Dole, IR Director. Please go ahead, Mandy.

Thank you. Hello everyone and welcome to our second quarter 2021 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Xu, our CFO and Director; and Mr. Zheng Yan, our CRO. Before we begin the prepared remarks, I would like to remind you of our Safe Harbor statements in our earnings press release, which also apply to this call. We may refer to forward-looking statements based on our current plans, estimates and projections. Also, this call includes a discussion of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP ones. Last, unless otherwise stated, all figures mentioned are in RMB. I will now turn the call over to our CEO, Mr. Haisheng.

Hello, everyone. I am very happy to report another quarter of record-breaking operational and financial results. During the quarter, financial institutions originated RMB88.5 billion loans through our platform, marking another record high, up 50% Y-o-Y and 19% Q-o-Q after reaching RMB100 billion milestone in Q1. Outstanding loan balance continued to grow to RMB111.6 billion in Q2 up 50% Y-o-Y and the 15% Q-o-Q. Total revenue was RMB4 billion in Q2, up 20% Y-o-Y and 11% Q-o-Q. Non-GAAP net income was RMB1.62 billion, up 71% Y-o-Y and 15% Q-o-Q. Despite a continuously changing macro and regulatory environment, we've delivered five consecutive quarters of record-breaking results. Over the past few years, we have build a comprehensive operational system that demonstrates remarkable resilience through cycles. To be more specific, our diversified users, acquisition channels and scenarios allow us to effectively hatch any volatility from a particular channel. Our extensive network of diverse financial institutional partners gives us sufficient flexibility in terms of funding cost, geographic coverage and pricing. Our improved risk management capabilities allow us to target different user segments with effective pricing based on different market dynamic. Our access to some key financial license at ecosystem bridge capacity to comply with average change regulatory environment. Over the last six weeks also, QFIN along with other Chinese ADRs has experienced extreme volatility in the market. While there are multiple risk factors triggered such as share price movement with the risk to market overreacting to the elements and ignoring the solid fundamental and strong growth prospects of QFIN. As such, after evaluation with the approval of our board, management decide to launch a share buyback program. The company intends to repurchase up to US$200 million of it's ADR through open market or other forms of transaction over the course of next 12 months. We…

Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our quarterly earnings call. For the interest of time, I will not go over all the financial line items on the call. Please refer to our earnings release for the details. As Haisheng mentioned, we delivered robust operating and financial results for the first half of 2021, powered by strong consumer demand for credit and further improvement in asset quality. The strong business momentum appears continuing into current quarter. In fact, we have seen record-breaking volumes in recent months, despite some reported softness of micro economic activities lately. Total net revenue for Q2 was RMB4 billion versus RMB3.6 billion in Q1 and RMB3.34 billion a year ago. Revenue from credit-driven service capital heavy was RMB2.4 billion compared to RMB2.45 billion in Q1 and RMB3.08 billion a year ago. The year-over-year decline was mainly due to facilitation volume mix change as capital-heavy contribution decreased significantly. Revenue from capital-light was RMB1.6 billion compared to RMB1.15 billion in Q1 and RMB259 million a year ago. The robust growth was mainly driven by exceptional progress we have made in capital-light and other technology solutions. During the quarter, capital-light and other technology solution contributed roughly 56% of total loan volume while the underlying take rates were relatively stable. We expect capital-light contribution percentage to continue to increase in the second half and to reach roughly two third of our total volume by the year end. During the quarter average pricing was 27.2% compared to 26.6% in Q1 and 27.2% a year ago. Assuming the reported 24% rate cap guideline will be implemented across industry, we are expecting over a pricing to gradually trending downs in mid 2022 to satisfy the rate cap requirement. In our stress test, even under the more restrictive and steep…

Thank you, management. Our first question is from Richard at Morgan Stanley. Please go ahead.

Basically, two questions from me. One is on the basically sending borrowing information through the credit scoring agencies, any detailed discussion on the actual process because it's been a little while. And you mentioned basically there has been a further discussion and there's different versions out there. Just want to see what is the latest development on that front? Secondly, is obviously very good loan volume, any discussion with regulators in terms of any views or guidance on the pace at the proper pace. Thank you.

So for the trust version of revelation on the administration of credit assessment business was announced and we have been communicating with regulators for a long time that actually in the market, that there is no standard solution available so far for now, and also as Mr. Zheng has mentioned that actually there are two or three solutions, we care about. The first one is that we applied for credit agency to launch a new credit agency. And the second one is we cooperate with existing credit agency quite an agency to continue our business. Also with our in-depth cooperation with KCP, which offers us another alternative before the solution, whatever solution we adopt in the end, the process of product might be different. However, it will not affect our results of the risk management and our risk models. So for your second question, regarding to our growth rate, actually, we have seen that the growth is not the problem, and the regulators focus more on the standardization of the product and our business. Also, we have seen that in the requirement by the regulators, they have issue that they want the platforms, internet platforms to sustain the growth and support real economy continuously.

Our next question is from Alex Ye at UBS. Please go ahead.

I'll translate my question. Firstly, on the regulatory developments, so it looks like the current direction from the regulators is continue to tighten the various perks that as part of the data collection by the internet coming in. So I'm wondering assuming the regulators issue more stringent regulations on consumer data collection then use in the future. How would that affect our current practice of data collection and use and how would that affect our credit model? Second question is on your plan to work combined with the 20% interest rate cap. So you mentioned that in your stress test, you are going to comply fully comply with the 10% cap type September if you're, but so if I stress that then with your -- your base case or your target trajectory or combined with that new cap and then third question is also related to the interest rate trend. So market concern about the 20% cap is only just the beginning of the future regulatory requirement of a further question down the overall lending rates. So I'm wondering if you have any comment on that and specifically given you also ramping up your MS -- your SME loan. So it looks at defect might be subject to further pressure from lower rate, no guidance. Also we appreciate your comments. Thanks.

Okay. Thank you, Alex, for your question. So regarding to your first one, that we actually wastage happening as well about the data capture and usage in this industry. So for regulators side, we think there are two basic principles. The first one is the minimum of standard for data capture. So apart from capturing data from the customer side, like forecasting before and all application, we are working for actively with third party credit agency for industry and asked to know data sources as well as replacement. And the second principle is that the customer authorization is mandatory before data capture. As you may know, that our removal of our 360 account applications from app stores was caused by these problems. So we will emphasize more on this principle in the future. We believe that with our relatively standard process and the impact of this tattling principles will have minimum the impact on our business. Regarding to your second question, the timeline of the all in interest rate cap at 24%, actually we say that there are different timelines for different institutions. Some institutions will you follow the guideline that outstanding balance of the of the loan over 24% will be reduced to zero by end of June next year. And some institutions follow the guidance that there will be no new originations by June next year. So we will follow these accordingly, Regarding to your third question that if the 24% interest rate cap will be lowered more, actually as all market participants know 24% interest rate cap has been the window guidance from regulators to banks for a long time. Recently media reports back to labor base interest cap, weight requirement expands to consumers nd those competence since the 24% cap has existed in the industry for quite some time, we don't think the rate cap will split to go down. Thank you for your question. The more regarding to the increased the rate of eat launch, of course, regulator is one to say the interest rate to be as low as possible, but there is no standards as it is similar to the consumer finance industry. They are different and virus needs and supplies of the SME loans. As a platform, as intermediary, we will continue to offer the various services to meet a different candid needs of the SME loans. Thank you.

Our next question is from Jacky Zuo of China Renaissance, please go ahead.

So let me translate, so congrats for these strong results. My first question is related to regulation as well. So for the 24% interest rate cap mentioned in the stress test for next year regarding the margin probably will go down to 3%. So just want to understand what these are, assumptions behind this chest test regarding to APR funding calls and credit cards and other expenses and any chance we can give offload for APR in the third quarter? And second question is regarding to the estimate loan. We we've seen other competitors also moved to this new business. So how are we going to differentiate our SME loan products and what is the APR margin and our growth target this year? And is this SME loan included in our new guidance? Thank you,

Thank you, Jackie. Regarding to your first question about the stress test, actually what we have delivered now is a relatively static test with all other factors, status quo, especially there's no improvement in our efficiency. So we asked him that there is no cost to changes in this version of the stress test. However, as we have known that there is a few improvement of our cost, for example, for our funding positive, before we have a large portion of our funding from a consumer finance component with a relatively higher funding positive, and our ABS volume is also limited. However, with a lowering cap interest rate, we can have more something from national banks or larger national banks, and we can increase our ABS volume. So we accept, expect our funding cost to be lowered by 1%. And we have the quality loss expectation to be lowered by around 1% as well. So another major cost, the customer acquisition costs will be lowered as well. So we expect that actually the take rate of 3% will be improved in the future For the third quarter of this year, we have started with a lower APR task. So the APR will be lowered, but there will be no meaningful impact on our financial results of the next quarter. So for your second question, regarding to our compatibilities of asset loans, so there are two aspects. The first one is about risk management. Our SME business is different from the traditional ones because we focus more on the SME side. Considering not traditional SME loans are over RMB10 million TK size is not fully data driven. However, we have adopted the do it engine regarding to our risk management about SME loans. That is we evaluate from the individual side and from the corporate side with TK size of 250,000. On average, we have used and food to equalize our accumulated experience on risk management in the past years on consumer finance. And the second advantage of us is the corporation with KCP. The only three platforms in China market that are able to have in-depth cooperation with banks. We believe we have the advantage of data and funding cost regarding to the SME business. So for our target date of SME loans this year, it, we account for around 10% to 15% of our total loan origination. And it has been covered in our guidance

Okay. Jackie just I have a few sort of a clarification and add up to Mr. Wu's comments there. Number one, the most important clarification, next 3% is not a margin. It's the take rate, right? Our net margin this quarter was 40%. And if anything, for the next couple of quarters, we'll probably see a little bit expansion of net margin then this Q2. So the 3% though is the take rate on loan balance. That's we have been saying this in the past. And then secondly also regarding the second half pricing trend even though we, our stress test was taken, the more drastic cuts starting from September 1st, basically on that day everything goes below 24, but in reality that's not going to be the case. Just like Haisheng mentioned, it's really dependent on the pace of our financial institution partners, their kind of progress there. So most likely it will be a gradual trending down toward that kind of a goal by the end of June of next year. So if you do a Adenia kind of distribution on any given quarter from now to the mid of next year, you'll probably looking at maybe one percentage or a little bit over one percentage point change in pricing if you're just average out. So that's the regarding the pricing change and then this kind of a change for 2021 for the remainder of 2021, we don't see any kind of a meaningful impact in loan volume and or the the take rate. That's why in my prepared remarks, I mentioned that the second half of probability will most likely keeping pace with the loan volume growth. You have our guidance for the full year, you can do the calculation, re-uptake at the the computation the, sorry,…

That's very clear. Thanks guys.

Thanks so much. That's the end of the Q&A session. I would like to hand it back to management for briefing closing remarks.

Okay. Thank you everyone again, to join our conference call. And if you have any additional questions, feel free to contact us. Thank you.