Ladies and gentlemen, thank you for standing by, and welcome to the Qifu Technology First Quarter 2025 Earnings Conference Call. All participants are in a listen-only mode. [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, Daisy. Hello, everyone, and welcome to Qifu Technology's First Quarter 2025 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 statement 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 would like to let you 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. In the first quarter of 2025 China’s economy showed early signs of a mild recovery under the guiding principles of stabilizing growth, optimizing structure and managing risks. Meanwhile, the global economy is undergoing profound technological transformation and structural changes. In an increasingly complex and volatile environment, we upheld prudent operations, leveraged AI to reshape the credit value chain and achieved high quality growth, delivering results that surpassed our expectations. By the end of the quarter, our AI powered credit decision engine and asset distribution platform empowered a total of 163 financial institutions and served more than 58 million users with approved credit lines on a cumulative basis. Total loan facilitation and origination volume on our platform increased by 15.8% year-over-year. With operational efficiency continuing to improve, our take rate for the quarter reached 5.7%, up 2.2 percentage points year-over-year. Non-GAAP net income increased by 59.9% year-over-year to RMB1.93 billion, while non-GAAP EPADS on a fully diluted basis rose by 78.5% to RMB13.5. Despite macroeconomic headwinds, we have consistently improved upon our past results and outperformed our market commitments through ongoing evolvement and enhancements to our business. At the start of this year, we began rolling out our AI-Plus credit strategy at scale, aimed at building the industry's first AI agent platform to empower core credit processes. We plan to recruit an additional 100 algorithm engineers by the end of the year and accelerate our transformation into an AI native organization. We have also established our deep bank division, which is driving the research and development of our AI Plus bank agent products to support the intelligent upgrade of financial institutions. In April we introduced an internal AI Agent platform and by May deployed five digital employees across key functions such as data…

Thank you, Haisheng. Good morning and good evening everyone. Welcome to our first quarter earnings call. We started 2025 with a solid Q1 as overall user activities were stronger than normal seasonality. While microenvironment appeared stabilizing early in the year, impacts from trade war added uncertainty recently. We will continue to focus on efforts to optimize operations and manage risk exposures in an uncertain market. Total revenue for Q1 was RMB4.69 billion versus RMB4.48 billion in Q4 and RMB4.15 billion a year ago. Revenue from credit driven service capital-heavy was RMB3.11 billion in Q1 compared to RMB2.89 billion in Q4 and RMB3.02 billion a year ago. The sequential growth was mainly due to increases in on balance sheet loans and lower early repayment discount. Overall funding costs further declined modestly Q-on-Q as ABS contribute a larger portion of our total funding in Q1. Revenue from platform service capital-light was RMB1.58 billion in Q1 compared to RMB1.59 billion in Q4 and RMB1.14 billion a year ago. The year on year growth was mainly due to strong contribution from ICE and other value-added service, more than offsetting the decline in capitalized loan facilitation, platform service account for roughly 56% of quarter ending loan balance. We expect the ratio to be roughly stable in the near-term. During the quarter. Average IRR of the loans we originated and/or facilitated was 21.4% compared to 21.3% in prior quarter. Looking forward, we expect pricing to be fluctuated around this level for the coming quarters. Sales and Marketing expenses increased 13% Q-on-Q and 42% year-on-year. The sequential and year-on-year increase were mainly due to larger volume contribution from API channels in both new and existing users. We added approximately 1.54 million new credit line users in Q1 versus 1.69 million in Q4. We will make timely adjustments…

Thank you. [Operator Instructions] Your first question comes from Richard Xu from Morgan Stanley. Please go ahead.

[Foreign Language] So I'll just do a translation. There's two questions. What kind of impact of changes do we expect once the new loan facilitation rules come into effect in October 2025? Secondly is what's the latest trends QFIN is seeing on the credit quality? How does it compare to second half of 2022 and 2023 when QFIN started to tighten credit risks? Will that impact the total expected loan growth for the year? Thank you.

Okay, Richard, thank you. Let me take your first question and I’ll then Zheng Yan will answer your second question. In terms of regulation, in our [indiscernible] the new rules released in April is a positive signal in the sense that regulator recognized the value of loan facilitation platforms. The regulator's intention is to promote a more orderly and healthy development of the industry, setting principles and gradually sequencing out the long tail of platforms which are less capable of complying with the industry standards and meets regulatory requirements. At the same time, the new rules recognize the value of leading loan facilitation platforms and encourage banks to adopt a wireless approach, set clear entry standards and build equal, long-term and mutually beneficial partnerships based on risk sharing. In conclusion, with the implementation of the new rules, the industry will become more organized, which will enhance the overall health and sustainability of the loan facilitation sector. As a leading industry player, we believe we will benefit from the less competitive market environment. We will continue to engage in proactive and constructive discussions with regulators, review our practices and operate with prudence and in compliance. And for your second question, Zheng Yan, can you answer it?

[Foreign Language] Okay, let me do the translation Mr. Zheng. First of all, I want to say that so far our asset quality has remained largely stable. Our C2M2 ratio, which measures the delinquency rate after 30-day collections, has fluctuated within a narrow band which is in line with our expectations. First, we believe that current situation is completely incomparable to that in the second half of 2022 and 2023. Our average C2M2 ratio was 0.64% in the second half of 2022 and 0.69% in the second half of 2023. The volatility in the second half of 2023 was partially due to the macro uncertainties and some line controls by China's telecom careers. In Q1, our C2M2 ratio came in at 0.6% which is significantly better than the second half of 2022 and 2023 and we expect this matrix to remain largely stable going forward. Right now, our risk levels remain well under control and we don't see a need to make any major adjustment to our risk policies. Therefore, as for the loan volume growth on a full year basis, it will largely depend on the consumer's credit demand. In Q1 we saw early signs of a mild recovery in credit demand and overall trend also seemed to be stabilizing. However, the consistently changing global trade environment has increased macro uncertainties. While recent U.S. China talks have shown some encouraging progress, we still need to monitor how things will develop and what kind of impact that will have on China's economy. So we will stay prudent in our operation at this moment. Last, I want to say that our business model is quite diversified, meaning that we can easily shift between asset heavy and asset light. That gives us the flexibility to adjust our asset allocation and balance between growth and risk. Based on what we've seen now, our outlook for full year loan volume growth is largely unchanged from what we expected at the early start of the year. Thank you.

Thank you. Your next question comes from Alex Ye from UBS. Please go ahead.

[Foreign Language] I'll do a translation. So my first question is about the asset quality indicators is specifically we saw day one delinquency ratio was up by two consecutive quarter and now reaching 5.0% [ph] in the quarter and then also bringing C2M2 ratio to 0.60%. So can you share with some more color on the reasons behind and how do you expect this indicator to trend going forward? The second question is on the credit demand trends in the last two months since we are seeing more noises coming from the external environments. So just wondering how has been the Q-on-Q trend in terms of credit demand? Thank you.

[Foreign Language] Okay, first of all I want to say that the slight fluctuation in our C2M2 ratio were in line with our expectations and also well within the target range we have set for our risk performance overall speaking our asset quality is at a healthy level compared to historical trends. As for the increase in the day one delinquency rate, it was mainly driven by the change in our loan mix. In Q1 the percentage of loan volume from our embedded finance channel increased by 31% from last quarter and this business line usually has a higher day one delinquency rate compared to our app based or H5 based business. Also, our overall loan volume was roughly flat Q-on-Q leading to a smaller portion of early-stage loans which usually have a lower day one delinquency rate. These two-structure change has led to a slight increase in our day one delinquency rate and our collection rate is very stable. As our CFO just mentioned in his prepared remarks, in April, given the uncertainty around tariff impact, we slightly tightened our credit standards. Since then, our risk indicators have remained stable through both April and May. Moving forward, we will continue to adjust our risk strategy on a dynamic basis. We expect our C2M2 ratio for the full year to remain largely stable around 0.6 level, based on the assumption that the macro environment doesn't change dramatically. Thank you.

And in terms of the credit demand, Alex, for the average daily loan volume, April was roughly in line with March. We did see some fluctuation in borrower activities due to the impact of U.S. China trade tensions, but we proactively expand our customer reach. Through partnership with diversified channels, we should be able to mitigate the potential decline in credit demand. In May, credit demand slightly decreased sequentially partly due to the May Day holiday, but this is just normal seasonality. Based on what we are seeing now, we expect loan volume in Q2 will be largely on track as we planned at the start of the year. Thank you.

Thank you. Your next question comes from Emma Xu from Bank of America Securities. Please go ahead.

[Foreign Language] So, with recent China-U.S. trade escalation, how do you assess the potential impact of the tariff tensions in the future? And will you tighten lending standards? And my second question is, what strategy is management currently adopting regarding potential ADR delisting risk? Will you consider a dual primary listing in Hong Kong? Will you take measures to improve the liquidity of your Hong Kong ticker?

Okay. Hi Emma. In terms of tariffs, we believe the direct impact of tariffs on our business is quite limited. First, the vast majority of our loan volume is in consumer lending. Second, we reviewed the industries of our users are involved in. In Q1, those related to experts accounted for just around 4% of our total loan volume. Among them, only about 1% were in sectors likely to be significantly impacted by U.S. tariffs. For these users, we have already adjusted our transaction and asset allocation strategies to mitigate potential impact from tariffs. On the policy side, U.S. China tariff talks have achieved some encouraging progress and we view that as a positive for both credit demand and asset quality. However, the global trade landscape has been shifting quite a little, quite a bit this year and this has added uncertainty to China's macro environment and may affect people's consumption sentiment. Liquor exports could put pressure on areas such as CapEx and household consumption. So in April, out of caution, we slightly tightened our risk strategy. So far, overall risk levels have remained largely stable. We will continue to monitor how the tariff situation impacts risk performance and dynamically adjust our strategy as needed. In addition, our diversified business model Also makes us more flexible to react to the potential challenges. And for your second question, therefore, you can answer it.

Sure. Emma. As you know, this ADR delisting basically resurface every few years depending on the U.S. side of a political need. Given that in early May the U.S. and China entered into at least a tentative kind of agreement on the tariff. So compared to early April, I think the delisting risk clearly kind of reduced by quite a bit. But with that said, we have been carefully evaluating the potential risk of the delisting. I think we are well prepared and we have a very clear to respond what if kind of a scenario. As you know, in November 2022, we completed the secondary listing in Hong Kong. This basically has given our shareholders more flexibility. They can choose to continue trading U.S. or move to Hong Kong market. So even in the worst-case scenario, where when our ADRs are forced to delist, investor would still be able to trade on our shares seamlessly in Hong Kong. As for liquidity, currently about 99% of our trading volume is in the U.S. market and in Hong Kong. Obviously it's very, very light. This mainly because U.S. trading offers investors more flexibility and relatively low transaction cost. However, if a false delist were to happen, all the tradings would probably naturally shift from the U.S. to Hong Kong. And accordingly, the liquidity in Hong Kong will for sure improve significantly. At that point, and our Hong Kong listing would automatically convert from a secondary listing to a primary listing in accordance with the Hong Kong Exchange rules. Okay. And we only need to file some additional document after that conversion, or I mean secondary to primary convert happening as after providing the document support. Therefore, we believe the secondary listing that we already have already provides sufficient protection for our shareholders. We will continue to obviously monitor as the situation evolves and take correct measures based on our ongoing assessment on this matter. Thank you.

Thank you. Your next question comes from Cindy Wang from China Renaissance. Please go ahead.

[Foreign Language] Thanks for taking my question. So, in first quarter, the number of new users with a previous credit was down 9% sequentially, but CAC up 23%. So what is the reasoning behind it? And since April, the trade war may cause a potential slowdown in loan demand. Has it affected the quality of new borrowers? And have you adjusted customer acquisition strategy? So how do you expect the customer acquisition cost in second quarter? Thank you.

Okay, Cindy first, the increase in unit customer acquisition cost in Q1 was mainly driven by change in our business mix. About 30% of our sales expenses came from API channels in the quarter. Unlike other channels, we pay channel fees for both new borrowers and the repeat borrowers for API. But when we calculate cost per user, we only count new users, not repeat runs. So when API channels contribute a higher percentage of loan volume, it pushes up our unit acquisition cost. However, the API channels are generating incremental loan volume for the company and the acquisition cost per loan through API is much lower than in feed marketing. We are able to recover the cost of the cost with just the first loan insurance. In addition, we increased spending on in feed marketing this quarter to reach higher quality users. Although these channels usually have higher acquisition cost compared to others such as app store or data driven marketing, users from these channels tend to deliver stronger and healthier value in the medium to long-term. We have also tried new strategies in this space, tailoring our approach to different pricing segments and applying different operations across a four-year journey. Furthermore, I want to say that we pay more attention to the efficiency of customer acquisition rather than the cost of customer acquisition. As we optimize the entire acquisition journey. The end-to-end approach has made our targeting more accurate in terms of both user quality and intent. This in turn boosts our overall lending efficiency for new users. This quarter, our conversion rate from new credit line users to new borrowers reached 74%, up from around 55% in the same period last year. That is to say that our end-to-end customer acquisition efficiency remains very healthy. Since the start of Q2 users, credit needs have been affected by the ongoing trade tension, which in turn will also have a certain impact on our customer acquisition efficiency. Going forward we will continue to closely monitor change in the macro environment and competitive landscape and adjust our acquisition pace accordingly. We will also carefully evaluate our acquisition cost against the LTV of new users and further optimize our channels to improve efficiency. Thank you.

Thank you. Your next question comes from Yada Li from CICC. Please go ahead.

[Foreign Language] Then I'll do a translation. My question is, given the policy stimulus to promote domestic consumption, looking ahead, how to view the trend of loan demand, funding liquidity from bank partners and the company's loan strategy amid this recovery environment, can we expect that the company can maintain a low funding cost in the long run and may adopt a more proactive loan strategy in the future? That's all, thank you.

Okay, Yada. Since the start of the year, China has rolled out a range of supportive policies aimed at boosting consumption, such as trading subsidies and the guidelines for stronger support to consumer lending. These measures have made a positive impact as we can see in the quarter. In the Q1 macro data, retail sales were up 4.6% year-over-year, beating market expectations. Credit demand on our platform was also slightly better than typical seasonal trends. On the funding side, the government announced cuts to both the interest rate and the reserve ratio in May. So we expect the funding environment to remain relatively supportive this year with some room for a further decrease in funding costs. In addition, we plan to further expand our ABS issuance and optimize our funding structure. Overall, we expect our funding cost for 2025 to decrease slightly from Q1 levels. And finally, about our lending strategy, I think it really depends on the risk outlook and the customer demand. Although our risk indicators remain larger stable at the moment, there is still some uncertainty in the broader macro environment. Therefore, we will continue to maintain a prudent strategy pursuing high quality and sustainable growth. That's all. Thank you.

Yes, Yada, I just want to add one little point here. So, as you know, we are very much focused on the take rate of our portfolio. And as in our previous discussion with the market, we communicated that we continue to see from a full year basis, we'll continue to see improvement this year 2025 versus 2024 in terms of the net take rate, assuming there's no dramatic micro changes from now to the year end. I think that's still the assumption we're looking at and I think that's still on target. Thank you.

Thank you. There are no further questions at this time. I'll now hand back to management for closing remarks.

Okay, thank you everyone again to join us for this conference call. If you have any additional question, feel free to contact us offline. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.