Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech First Quarter 2022 Earning 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 Dong, IR Director. Please go ahead, Mandy.

Thank you. Hello, everyone, and welcome to our first quarter 2022 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’d like to remind you of our Safe Harbor statement in our earnings press release, which also applies to this call. We may refer to forward-looking statement based on our current plans, estimates, and projections. Also, this call includes discussions 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 figure mentioned are in RMB. I will now turn the call over to our CEO, Mr. Wu Haisheng.

Hello everyone, I'm very happy to report a strong start to 2022. In Q1, total loan origination and the facilitation volume reached RMB 98.8 billion up 33% year-over-year, and 2% q-on-q, outstanding loan balance reached RMB 146.7 billion up 44% year-on-year and 3% q-on-q. Despite the impact round the Chinese New Year and the macro and the COVID outbreaks, our solid performance continued to demonstrate the resilience and flexibility of our operations. I reckon the major concern to the market right now is the COVID outbreaks. To deal with the situation, we created precautionary plans, we took rapid response measures to make the impact on our business under control. Such an effective response derived from our successful experience, handling the pandemic that hit all back in 2020. Back then, our response was seen as very timely and effective in the industry. As the COVID resurgence in Q1, a number of Chinese cities, our team will set and implemented a range of pre-emptive counter measures. For example, we launched a multiperiod of pandemic alert system for the cities that are key to our business. In addition, we strategically scaled back our business for high-risk customers in the industry hit by outbreaks, such as recreation and hospitality. Meanwhile, we proactively communicated with major funding partners about potential extension for loan repayments. For a borrower who are unable to make repayments on time or lost the capacity to repay in the near term due to COVID. Our customer service team step in and help them to apply for repayment expansion. In the cities severely affected by the lockdown it was very difficult for our offline team to acquire new customers, in such cases, we quickly shift our team focus from offline customer acquisition to serving existing customers these allowed us to uphold the…

Okay. Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our first quarter earnings call. As Haisheng discussed earlier, we had a pretty solid quarter in the rather rough period of time from micro economic perspective. Consumers demand for credit come in more or less consistent with normal seasonality in Q1. Well, we did experience some impacts from the resurgence of the COVID in some regions in China. Overall, asset quality was actually modestly improved during the quarter as optimization of our risk model and the contribution from high-quality new borrowers more than offsetting COVID-related fluctuation among existing borrowers. Of the two leading indicators of the asset quality, overall day one delinquency improved to 5.2% from 5.4%, q-on-q. More importantly, day 1 delinquency for new borrowers in Q1 came in well below 4%, indicating clearly better quality versus existing borrowers. Overall, 30-day collection rate declined modestly to 86% from 87% q-on-q, mainly because we have to make necessary adjustment to our collection operation in regions been significantly impact by COVID. Again, we see clear deviation between new borrowers and existing borrowers. For new borrowers, 30-day collection rate remained above 90% in Q1. These risk metrics further validate the effectiveness of our user acquisition strategy, which focus on high-quality segment of the market. Total net revenue for Q1 was 4.3 billion versus 4.4 billion in Q4, and 3.6 billion a year ago. Revenue from credit driven service capital heavy was 2.9 billion, compared to 2.7 billion in Q4 and 2.5 billion a year ago. The year-on-year and sequential increase was mainly due to longer average tenor of the loans, a growth in our balance sheet loans, as well as the releasing guarantee liability on previous loan balance more than offsetting the negative impact from decline in average prices of…

Thank you, management. We will now begin the Q&A section. . Our first question, Yao Lee, CICC.

Then now to the translation part. So the first one is about we have made capital injection last year for our micro loan license. And could you please elaborate more about how we plan to use it? Is it just a preparation for applying for the national license? Or are we actually started using it as an alternative funding source maybe in the very near future. And the second one is considering the resurgence of the COVID-19 and uncertainties in the economy. There will be some challenges especially in the loan collection and in the offline business development. So to be more specific, how are we going to dealing with the situation? Thanks.

Hi, for two of your questions, for the first one. Yes, you are right for the 5 billion capital that we used to inject into the micro lending license. On the other hand, we also leveraged the capital at the funding resource through the channel of ADS or joint lending products, both of which can improve our leverage ratio. For your second question. First of all, we do not do the post collection through offline, the pandemic impact us only through the offline tech mark revision. Half of our loan process are conducted through online and that's a very valid limited through pandemic. Hope this clarifies all your questions.

The next question is Thomas Chong, Jeffries.

Thanks management for taking my questions. I have a question regarding our big friend on a month-by-month basis, starting in April? And how should we think about the low end and the high-end of the guidance? And our assumption about the couple of weak trend in the coming quarters? And how should we think about the recovery in terms of the consumer sentiment in coming quarters? My second question is about how are we seeing the business trend in top and lower tier cities, given the pandemic impact more on the tier one cities? Thank you.

Okay. Hi, Thomas. Thanks for your question. So, from the overall business trend, we look at it. Our current assumption is that as you know that Shanghai will be gradually reopened starting from maybe June. And so we are assuming certain level of activity return to Shanghai, maybe starting next month. And we don't expect a sort of a V shaped turn around right away. I don't think that's viewed in our model. We are expecting a rather compared to say 2020 Wuhan pandemic happened, it was a V shaped turnaround, but this time we are expecting a rather slower, gradual kind of recovery after the COVID. So that's what we are building in our forecast. In terms of tier one cities, again, the Shanghai situation is well published and, like I said, we at least according to the official media it is gradually reopening. And we expect to get some kind of a return to normal operation starting from June. For other city like a Beijing for one we -- from operational wise, we probably don't have much large exposure in Beijing. But to the Beijing situation is slightly different from Shanghai or I will say quite different from Shanghai meaning like a significant portion of the normal life in cities are still remaining. And yes, there are certain kind of a community lock downs and so on. But the situation is much better than it was in Shanghai at the peak of the pandemic last month. And so, we are again, for this kind of situation, we obviously will closely monitoring the development in Beijing, but I don't think it will be anywhere near the Shanghai situation in terms of impact to our business or anything.

Next question is Alex Ye from UBS.

Okay. I will translate all my questions. First one is on asset quality. I think give us some color on your latest trend on day one and M1 collection rate. We were expecting them to remain stable or some deterioration in Q2. And also just want to clarify as mentioned, the expected loss will improve from 2.8% to just want to confirm whether that refers to the total loan book. And second question is on take rate and APR. What's your average APR now? And what's the current trend from now to Q2 to expect it to further decline and due expect your take rate to bottom in Q1 or may continue to hedged on? And then, all your new users that have a bit lower risk, I'm assuming they will also have a lower APR. So from a risk adjusted perspective, how does their return compared to a users? Thank you.

Thank you. Okay, thank you for your question. So regarding to the vintage loss, it indicates the new transactions draw down in the first quarter and for the new customers who inquired to in the first quarter, actually the performance will be better than the new transactions in the first quarter, because we have seen the quality of our new customers that have been improved. The first question, the delinquency rate also refer to the existing loans on book and we have seen that it has been decreased in April and May, and if you check the new transactions, and it will be decreased to 3%. Regarding to the recovery or collection rate, and apart from regions like Shanghai, Beijing and Wuhan, for other regions, the recovery rate is better than April. So we foresee that the overall performance or recovery rates will be better in the second quarter. Hopefully it can clarify your question.

Yes. Starting in April, the IRR long production facilitated and originated through our platform is about 22%. In the near-term we expect this rate to remain relatively stable, we do not expect to see a big drop on APR rate.

For the new customers we acquire in the first quarter. If we only look at the short-term return, yes, compared to previous user base is relatively lower. However, we value more on the whole lifetime value that the new group users contribute a lot much better than the previous group user group.

Operator, we will probably have time to take one more if any.

Next question is Ethan Wang from CLSA.

Just a quick follow-up question, on take rate, between narrow take rates also affected by funding cost just wandering in the cloud environment whether it depends, we have dropped in with some pressure . Just want to see if management can offer more color there. Thank you.

Yes. Ethan to answer your question, first, we do notice we have sufficient funding supply this year. We noticed funding cost declining trend. We failed, that we do not see noticeable decline actually happened. This is because in that year 2021, we have already brought down a lot of our funding cost. And next point is, we focus more on our tech business, for example, capital light, which is less impacted by funding cost.

I just wanted to add a quick point there. So basically, the Haisheng means that as we expand into the large national banks, that's actually our focus shot for this year. Along the way, there will be modest drop in funding costs, but not as significant as we did in the last year or previous couple years. Because at 7% actually, we are already probably one of the best funding cost among our peers. Thanks.

And this is the end of the Q&A session. Now I hand back to management for closing remarks. Thank you.

Okay. Thank you again, for everyone who join our conference call. If you have additional questions, please contact us offline. Thank you.

This concludes our conference call. You may disconnect now. Goodbye.