Ladies and gentlemen, thank you for standing by, and welcome to the Qifu Technology 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 also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Karen Ji, Senior Director of Capital Markets. Please go ahead, Karen.

Thank you, Emily. Hello everyone and welcome to Qifu Technology's second quarter 2024 earnings conference call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Wu Haisheng, our CEO; Mr. Alex Xu, our CFO; and Mr. Zheng Yan, our CRO. Before we start, I would like to refer you to our Safe Harbor statements in the earnings press release, which applies to this call as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP financial measures to GAAP financial measures. Also, please note that unless otherwise stated, all figures mentioned in this call are in RMB terms. Before we start, we will like you to know that today's prepared remarks from our CEO will be delivered in English using an AI generated voice. Now, I will turn the call over to Mr. Wu Haisheng. Please go ahead.

Hello everyone. Thank you for joining us today. Despite the ongoing macroeconomic challenges since the start of 2024, we achieved a solid performance by adhering to our prudent execution and quality development strategy. By the end of Q2, our platform empowered a total of 160 financial institutions and served more than 53 million users with approved credit lines on a cumulative basis. During the quarter, we further solidified our business foundation and improved asset quality and operational efficiency with a keen focus on the quality of loans. These efforts enabled us to significantly improve our risk performance and record the highest quarterly profit over the past 11 quarters, highlighting the strong resilience of our business. I would like to thank our entire team for their persistent drive for excellence and ongoing self-development, which has enabled us to navigate an ever-evolving market environment. At the same time, we are building a more open ecosystem and adopting a platform approach to create value for both users and financial institutions, aiming to further expanding the boundary of our business. In Q2, our revenue increased by 6.3% year-over-year to RMB4.16 billion, with our net take rate increasing by over 1 percentage points year-over-year to roughly 4.4%. Non-GAAP net income increased by 23% year-over-year to RMB1.41 billion. While non-GAAP net income per diluted ADS increased by 32% year-over-year to RMB9.16. Thanks to our outstanding operational results and efficient capital allocation, our ROE in Q2 continued to outperform industry peers coming in at 25.4% during the quarter. Despite facing macroeconomic headwinds, our asset quality has steadily improved in Q2. Based on our keen insights into risk, we proactively tightened our overall credit standards over the past three quarters, iterating risk strategies across loan facilitation, credit operations, and post credit processes to improve risk metrics. Risk indicators…

Okay. Thank you, Haisheng. Good morning and good evening everyone. Welcome to our second quarter earnings call. While macroenvironment was still challenging, we continue to make good progress to optimize operations, improve efficiencies, reduce risk exposure, and deliver strong financial results in the second quarter. Total net revenue for Q2 was RMB4.16 billion versus RMB4.15 billion in Q1 and RMB3.9 billion a year ago. Revenue from credit-driven service, capital-heavy was RMB2.91 billion in Q2 compared to RMB3.02 billion in Q1 and RMB2.79 billion a year ago. The year-on-year growth was mainly driven by growth in on-balance sheet loan and the contribution from other value-added services, partially offset by a decline in off-balance sheet loans. On-balance sheet loans account for over 28% of the total loan volume in Q2. Overall funding costs further declined over 50 bps sequentially and over 150 big year-on-year with the help of our strong relationship with financial institution partners and new ABS issuance. Revenue from platform service capital-light was RMB1.25 billion in Q2 compared to RMB1.14 billion in Q1 and RMB1.13 billion a year ago. The year-on-year growth was mainly due to strong contribution from ICE and other value-added service, substantially offsetting the decline in capital-light loan facilitation. Overall, the contribution from platform service further increased as we try to strike an optimal balance between risk-bearing and non-risk-bearing assets in an uncertain macro environment. In Q2, we saw continued sequential improvement in revenue take rates for both cap-heavy and cap-light business. During the quarter, average IRR of the loans we originated and/or facilitated was 21.6% compared to 21.5% in the prior quarter. Looking forward, we expect pricing to be fluctuate around this level. Sales and marketing expense decreased 12% Q-on-Q and 16% year-on-year, as we intentionally control the pace of user acquisition in an uncertain environment.…

Thank you. [Operator Instructions] We will now take our first question from the line of Richard from Morgan Stanley. Please ask your question. Richard, your line is open, please ask your question.

[Foreign Language] Two questions for me. One is loan volume for second half of 2024, not for 2025 as well as any expected changes in take rate? Secondly is, obviously, the profit guidance for the quarter is quite strong, any drivers behind that? Thank you.

[Foreign Language]

Okay. I will do the translation. First, regarding the loan volume growth, we expect loan volume to grow in the second half of the year compared to the first half, mainly because a few reasons. The first one on demand side, we observed that credit demand is relatively stable recently, and the user activity level has slightly increased in June and July with the logging initiation rate of app users rising by about 7% compared to May. Second, on risk side, the improvement of risk matrix is on track and the momentum continues in Q3, which gives us more comfort that we can open up a little bit our past ratio and the credit line to enhance the activity of our existing users. Third, in terms of new customers, we have diversified our channels and improve our efficiency in customer acquisition in the first half of this year. And the quality of new customers has been significantly optimized. Thus, we may try to invest more to attract new users through diverse channels in the second half. Fourth one, our platform strategy is basically to use diverse cooperation model with more financial institutions to serve a more diversified user base, which will enhance our customer coverage and the conversion rate. So, in summary, we have done a lot of work in the first half of this year, giving us more room to try and open a bit, given the improving demand and risks. So, we believe that the loan volume in the second half of the year will increase to some extent. At the same time, this work is also laying a foundation for our longer term growth.

[Foreign Language]

Regarding the take rate, I would like to address that the main drivers of our profit growth in Q3 is mainly attributed to three reasons. The first reason is the credit cost and funding costs will continue to decline in Q3. Second reason is that through our platform strategy, we not only enhance our users' coverage, but also achieve better monetization. And third reason is that in Q3, the proportion of asset-light business model will be further increased and the revenue recognition pace of asset-light model is relatively faster, which is also a reason for the rise in our take rate in Q3. So, based on these reasons, we believe that the take rate in Q3 may not be a normal level and we won't expect our take rate to rise continuously in the future given we have been keeping improving on the take rate in the past quarters. So, in the long run, we believe 4% to 4.5% is a relatively reasonable level for our sustainable take rate. Thank you.

Thank you.

Thank you. Our next question comes from the line of Emma Xu from Bank of America. Please ask your question Emma.

[Foreign Language] So, congratulations on the very strong results amid the macro challenges. And we noticed that Mr. Zhou Hongyi has resigned as the Chairman and Director of the company, so what are the main consideration behind these divisions and while it has an impact on the company's operations?

[Foreign Language]

Okay. I will do the translation. Thanks Emma. Ms. -- Mr. Zhou has resigned from his position as Chairman and Director of the Board of the company, mainly due to personal reasons. We also believe that the company has become a mature enterprise in Fintech space and hopes that the company can develop more independently, maintaining its own brand and development strategy. As our largest shareholder, Mr. Zhou is very confident in the company's long-term development and has been increasing his holdings in the company's stock in the secondary market over the past two years. According to our annual report, Mr. Zhou and his affiliates increased his holdings by 1.58 million ADS between February 2023 and February 2024, and he also increased its holdings during the window period this year. Mr. Zhou has not been involved in the company's day-to-day operations in the past, so his resignation will have no impact on the company's operations. In the future, Mr. Zhou will continue to provide his valuable insight to the company, particularly in areas of strategy and AI. So, on behalf of our management team, I would like to express our heartfelt gratitude to Mr. Zhou for his contributions to the company during his tenure as Chairman. Thank you.

Great. Our next question comes from the line of Alex Ye from UBS. Please ask your question Alex.

[Foreign Language] So, we have noticed that the company has further accelerated the pace of share buyback since the Q1 results in middle of May and it's also faster than the original schedule of one year for the RMB250 million buyback quota. So, I'm wondering what's the consideration behind this? And then should we be expecting the company will be able to maintain this pace of buyback for the rest of the year? Thank you.

Okay. Alex, I will take this one. So, yes, as of August 13th, we have purchased $211 million worth of stock out of the RMB350 million authorization, which is about 60% into the program, much faster than the time schedule. And the reason we are accelerating our repurchase during that period is, for one, is because the macro environment is still pretty challenging. And the market itself is still very much undervalued the company's stock. We want to use that opportunity to do more repurchase. And this will allow us to create additional EPS accretion and ultimately, maximize the value of our existing shareholders. Since we already finished 60% in about one-third of the time of the plan, going forward, we will continue to execute the repurchase program based on the market condition. And if the market consistently undervalue our equity, we will probably will maintain a continued very active pace in the market and complete the current program ahead of the time schedule.

Thank you.

Thank you. Our next question comes from the line of Yada Li from CICC. Please go ahead Yada.

[Foreign Language] Then I will do the translation. Hello management. Thank you for taking my questions. The first one is about the funding cost. What are the main reasons for the decline on the average funding cost? Is it the ABS insurance or more discounts on the required returns by the financial institutions? And if you look at the two parts separately, how much room is still there for the decrease of funding costs in the future? Secondly, the asset quality of the company has stabilized and improved. What are the main reasons to see this trend? And from the cost -- from the credit cost perspective, when we see the asset quality returns to the level of normal years, how much will it be optimized and in what pace should we see the optimization in the future? That's all. Thank you.

[Foreign Language]

Okay. Thanks, Yada. First, in terms of the overall funding cost reduction, the significant reduction in the funding costs for our capital-heavy loan facilitation this quarter is the most important driving factor. And the cost of ABS, which was already quite low has further decreased in this quarter. In addition, we have seen a slight increase in the proportion of ABS from a funding structure perspective. So, these three factors have collectively led to an overall decrease in the funding cost by 56 basis points sequentially in Q3. Looking ahead, we believe that funding costs will remain largely stable with a possibility of a slight decrease, but room for further reduction is quite limited.

[Foreign Language]

Okay. Let me do the translation. Our overall risk indicators, mainly in the day one delinquency rate and the 30-day traction rate showed stability and improvement in Q2, mainly for three reasons. First, in light of the macro uncertainties, we took a more cautious approach in new loan origination in Q1 and Q2, significantly improving the quality of new loans through a substantial optimization of risk models and strategies compared to the Q3 and Q4 of last year. Second, in Q2, we further optimized the structure of asset and funding merchants by selectively introducing more financial institutions that can complement our risk capabilities or risk appetite. We have formed a differentiated and complementary cooperative model with these financial institutions in risk management, making our asset quality more robust and solid. Third, in terms of managing the risk of the existing loan balance, we continue to optimize post loan operations in Q2. For example, by strengthening advanced reminders for customer repayments, we effectively reduced our day one delinquency rate. At the same time, we optimized the management and the performance review of the external collection team, which also helped us to improve the traction rate. Regarding the second half of the year, based on the current risk performance, as Haisheng just mentioned, we may moderately open up a bit in terms of our cost ratio and the credit limits to enhance the engagement of our existing customers. At the same time, we have clear management measures to further optimize the user base structure, including further optimizing line credit limits and the pricing combination, comprehensively upgrading customers' rights and optimizing the customers' experience on our app product side. This will increase the portion of high-quality users in the overall asset portfolio. Thus far, we believe second half overall risk performance should be better than the first half and on a relatively stable trend.

Thank you.

Thank you. We will now take our last question from the line of Cindy Wang from China Renaissance. Please go ahead Cindy.

[Foreign Language] So, the company has maintained a relatively conservative pace of customer acquisition in the first half of this year. So, what is the management's view of the pace of customer decision in the second half of this year? And will CAC be roughly the same as the first half of this year? Thank you.

[Foreign Language]

Okay. Let me do the translation. Thanks, Cindy. Regarding your question, we will say in the second half of the year, we may accelerate a bit our customer acquisition pace compared to the first half. This is because all the efforts we have put in profitability improvement in the first half is bearing food, giving us more confidence to acquire new customers. Furthermore, we are continuously expanding our customer acquisition channels, making our customer acquisition approach increasingly diversified. Our customer acquisition is not just limited to information flow advertising, but quite diversified. Over the past few quarters, our embedded finance model has maintained rapid growth with the ROA also being continuously optimized. At the same time, we are expanding two more API channels, such as e-commerce, short video, and other scenarios. We are also exploring embedded finance model with banks' apps. We are also referring some of our high-quality dormant users to the banks. All these initiatives will help us expand our customer reach or boost our loan volume. In other words, we are not simply pursuing loan volume growth, but quality loan growth, thus achieving an overall improvement on our business housing. Even at a similar scale, the quality of our business now is significantly better.

Thank you.

Thank you. We have now reached the end of the question-and-answer session. Thank you very much for all your questions. I'll now turn the conference back to the management team for closing comments.

Okay. Thanks again for everyone to join us for the call. If you have additional questions, please feel free to contact us offline. Thank you. Have a good day.

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