Ladies and gentlemen, thank you for standing by. And welcome to the Yirendai's Second Quarter 2018 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, 29 of August, 2018. I would now like to hand the conference over to your first speaker today, Ms. Lydia Yu. Thank you. Please go ahead.

Thank you, and welcome to Yirendai's second quarter 2018 earnings conference call. Today's call features presentations by our CEO, Ms. Yihan Fang, and our CFO, Mr. Dennis Cong. Mr. Yang Cao, our COO and CTO; and Ms. Joanne Liu, our VP of Finance, will join the presenters in the Q&A session. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that may cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yirendai's filings with the U.S. Securities and Exchange Commission. Yirendai does not undertake any obligation to update any forward-looking statements, except as required under applicable law. During this call, we will be referring to several non-GAAP financial measures and supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. With that, I will turn the call over to our CEO. Yihan, please begin.

Thank you, Lydia. And thank you all for joining us today. The past several months has been challenging for the overall in the industry in China. However, we have seen continued efforts from the government to promote the healthy developments of industry. This was illustrated by the recently announced rules and guidelines by CBIRC and various industry associations. For example CBIRC has been actively issuing guidelines for P2P platforms to comply with any tool eliminate the false and retain the tool. Most recently the national online lending special working group under CBIRC issued a notice to all local financial bureaus on carrying out compliance inspections of P2P platform. They also issued the much anticipated P3 platform compliance inspection check-list consisting of 108 rules. We have already begun our self inspection process based on the check-list and expect to upload our self inspection report by September. Back to the second quarter of 2018, we have again achieved solid operating results by leveraging our renowned brand name and strong online operating capability. Our loan origination volume increased by 38% from Q2 last year to RMB11.7 billion, while industry transaction volume in Q2 2018 declined by 15% from Q2 last year according to [ppi.com]. We are pleased to see we have successfully managed market headwinds and outgrown the overall industry. In Q2, the average AUM of our individual investors continue to increase to RMB146,000 with an averaging less than term of approximately 10 months. We have been spending efforts in client relations management through systematic online/offline investor education, interactions and communications. Through these efforts, we have successfully strengthened investor's confidence in our platform. At the same time we have made concrete progress in establishing institutional cooperation. We have established partnership with Goldman Sachs and the XinWang Bank, one of the free internet banks in China an institutional funding]. We have also launched a leading product guaranteed by PICC in early July. Furthermore we became one of the first 15 lending companies to connect with China’s first unified credit reporting platform Baihang credit. Going into the remaining several months of the year, we will focus on managing the credit risk of our asset portfolio optimizing our individual investor base, establishing more institutional partnership and sustaining the strong momentum of Yiren Wealth. In addition, we’ll continue to invest in technology, improve our operating efficiency, and attract more talent to position our self to long-term growth. We’ll stay firmly committed to build Yirendai into the exceedingly compliant online platform in China to offer safe and professional financial product and services to consumers. With that, I’ll turn the call over to our CFO Dennis to discuss about our Q2 financial results.

Thanks Yihan, hello everyone. For our financial update, I will only focus on key items of our business operation and financial performance and you can refer to detail financial results to our earnings release and IR deck that is now online. Total loan origination grew 38% year-over-year in Q2 2018 to RMB11.7 billion and in particular loans from online channels grew 78% year-over-year. During this quarter we continue to proactively tighten our risk policy amid uncertain marketing environment. In addition we have also proactively controlled loan growth due to the balance cap set by the local regulator in June 2018. During the quarter, 76.3% of borrowers came from online channels and 65% of loans were generated online. About 23.4% of loan volume came from repeat borrowers in Q2 2018. Total net revenue grew 28% year-over-year to RMB1.52 billion during the quarter with a corresponding net revenue take rate of 13% as compared to a revised net revenue take rate of 14.3% last quarter. However during the quarter over 10% of loans were generated through our partnership with Baidu as the loans facilitated through our Baidu partnership are founded with the trust arrangement. The service fees on these loans is reflected as change in fair value of the loans in non-operating income instead. Adding this portion of income back to net revenue, our net revenue take rate for Q2, 2018 would be 13.9% very stable quarter-over-quarter. Next onto wealth management business, building Yiren Wealth into a leading online wealth management platform in China remains our top strategic focus. Despite recent challenging industry environment as we see large numbers of problematic peer-to-peer platform shutting down, our cumulative registered investors grew 27% year-over-year to 7.3 million by the end of June 2018. And a number of active investors were 730,000 as of June…

[Operator Instructions] Your first question comes from the line of Alice Lee of Credit Suisse. Please ask.

I have two questions which are more related to the accounting things. The first one is that we see in the other income we are seeing gains from the fair value adjustment related to the consolidated ABS. I would like to know what is this gains for? And my second question is about the take rate decline, because we see in the second quarter of this year the take rate declined further compared to the first quarter, so I would like to know could you give us the breakdown of the impact, say, what percentage of the impact comes from the customer upgrade, what percentage comes from the increased contribution to the surety assurance and the quality assurance program. Thanks very much.

Hi Alice, its Joanne. So I take the first question. For the fair value change you see from the charter plan, it's mainly caused by, as Dennis just mentioned in his transcript is, caused by the partnership with Baidu. So basically we deployed our own cost capital to the adjusted plan and that are products that we cooperate with Baidu to issue the loans and because it's a adjusted plan so we don't really, so it follows the investment, it's like an investment, so the fair value change is similar to the regular revenue take rate you see in the net revenue. So that's why if you want to compare the take rate of this quarter, the second quarter with last quarter, you really need to add the fair value change back through the net revenue number to get a comparable number.

On the revenue take rate, I think for the Q1 we had revenue take rate of about 14.3% in Q1, and then in Q2 if you just look at the net revenue take rate is 13%, part of this is due to the increased level of the contribution to the credit assurance program and also some movement in terms of the overall product mix from both channels as with duration, and also some part of it due to the product risk - product pricing adjustment as where we're going through some of the regulatory compliance process. However, as mentioned, if you do add the Baidu contribution or the business revenue related to revenue, the overall revenue take rate is actually coming back to 13.9%, so relatively flat. I think the upside of the revenue take rate is some of the product mix and percentage are driving a little bit overall revenue take rate moving up somewhat from Q1 that will offset the impact from the contribution through the credit assurance program to offset the increase of the contribution to the credit assurance program.

May I have a follow-up question, so on the design of the trust plan, I would like to know where are the fair value adjustment net off the credit cost or not and how are we providing rest of protection for the trust plan.

So basic way - yes, the answer is yes. It's not off the estimated credit loss from the assets, otherwise it's not fair valued. So currently we don't have a credit protection plan for the trust plan because we are - even though it is the only beneficiary owner of the trust plan. But you can see it as a pre ABS as well. So basically we prefund ABS and so that we can do, we can stabilize the asset into different chance and transfer, for example the single insurance to other financial institute.

The next question comes from the line of Bo Pang of China Renaissance. Your line is now open.

I have some follow-up and on accounting too. So first one is just trying to confirm verify the consolidated accounting change on revenue line. Am I getting a number roughly RMB1.5 billion in the second quarter basically I add the provision expense back to the revenue and - as well as the fair value of the trust plan as well. Sorry, I subject the provision expense and add the fair value back to get 1.5 billion so that's number one. And number two is on the new revenue line account management services just want to get some clarification in terms of what exactly this one. My understanding is for the portion of ASC606 adjustment for the previously deferred revenue plus the provision expense that’s the top line. And secondly I want to have some more color on a cash flow too because this quarter I think our cash outflow on operating activity is 1.4 billion. I think the impact is primarily from the take rate or from the few change - or from fee structure change to the monthly fee. And then probably the higher QAP. So try to get an idea like when do we see this trend get reversed going forward and then do we have enough of liquidity to fund operation that’s it for now? Thank you.

So I’ll take your first question. In terms of getting the comparable net revenue, yes your approach is correct so you basically subject the provisioning expense and that fact that had to change from the adjusted plan. And for the account management services it’s really seem to accounting policy change in this quarter. So we basically followed our auditor's advice and took a more conservative approach to recognize our revenue but before or in last quarter we see that our investor as our sole customer and from this quarter - so we take those thoughts and investor as our customers and so the account management services is really relating to the service or the fees we charge to our investors. From the account management service and the service related to the automated investment tool. And that fee is charged on a monthly basis so before we recognize the majority of the service fee over the investment period up from and now we follow a more conservative approach and recognized on a monthly basis until the cash is collected from the investors. And for the borrower the basic logic is pretty much the same as previous quarter but we do cross up to present the provisioning expenses related to the credit risk from the fees we collect from the borrower. Yes and in terms of cash flow, so correct that we see an outflow of 1.3 - about 1.3 billion outflow on the operating activities and that's really related to - mainly related to two reasons one is that we change more product or the portion of our volume to a pure monthly fee collection schedule and the other is related to the payout from the previous quality assurance program and currently the guaranteed scheme will provide to the investors to cover the credit loss. So going forward I think the cash flow at Q3 we estimate a basically breakeven on the cash flow position and in Q4 we will significantly enhance the cash inflow because as the cash cumulative on the monthly collection, the monthly product and it takes some time for the cash to come in and to build up the cash flow.

So just add on to that we also mentioned there's a 880 million of our own capital is being deployed during the quarter that also contribute to the reduction of our cash balance. However, as you know there are being repaid back on monthly basis - and actually with decent yields return on this 880 million. So we’ll see that recovery of that back through the next few months 12 to 18 months. And also our business model are rather have a lot of leverage into it and what we see that when the business volume drop, our working capital needs for customer acquisition also reduce. So actually we have a rather flexible this model, so combined with that and also some of the movement in terms of product mix of the fees collection schedule as Yihan mentioned we expect that we reaching a cash flow breakeven in Q3 and probably I see some significant improvement in Q4.

Can I have a quick follow-up on this, just want to get an idea on what’s the percentage of our monthly fee charge product and then when do we expect this to fully phase out. And also I think if the current upfront fee structure fully - comply with the regulation requirement? Thank you.

So as you know we have online channels and credit referral channels. These two different channel products sometimes follow different fee collection schedules. And from the online perspective we have certain percentage of the fees collect upfront and then certain amount of them will be collected through the months that will continue and retain to be the same. And then from the offline product perspective we had both monthly collective fees, as well as more upfront collection fees. So these products mix will be adjusted as we progress through the Q3 and Q4. In terms of - and as a matter of fact we’re actually going to probably see more from upfront of these collection in terms of scheduling as a product mix. As for the regulation compliance perspective we have followed clearly with the guidelines in terms of when and where you can deduct the platform fees from the customer's account order. And then to demonstrate a clear borrowing cost for the borrower and so we believe we’re in good compliance with regulators in terms of our product design and fee collection schedules.

The next question comes from the line of Richard Xu of Morgan Stanley. Your line is now open.

Two question firstly could you comment on the - basically the net charge-off rates it seems like you know some of these fourth quarter I guess some of the first quarter, second quarter last year vintage is still trending up a little bit. I’m not sure what trends are you seeing at the moment. And also there are some industry wide fluctuations in investor base, what's our trends on the investor base, what strategy was used to favor during investor base and the moment. And lastly, it seems like the dividend has been sustained this time, just wondering what the future strategy on that? Thank you.

So, in terms of net charge-off as you can see from our disclosure, the 2015 charge-off is around 10%, in 2016 it's around 8.7%. So these are still demonstrate a good performance. And as you remember or if you're looking from charts, historically, the 2016-2017, early vintages indication have demonstrated better than 2015. So we saw that as well as we are continuing to beef up our collection efforts, adding manpower and also testing out new ways of incentivize borrowers to repay and also as you know that the government has showed strong support to the industry asking all the peer-to-peer platform to report the severe delinquency borrowers list so that can be connected to the national credit reporting system, these we believe combine will also help us to drive our collection efforts and this is probably going to pan out through the next months or quarters. That will also gain confidence to us in terms of overall asset quality performance. So based on that, that's how we have decided in terms of - well, the contribution amount level for the credit assurance program. And then in terms of overall movement as you probably are very familiar with, the overall industry has seen a kind of spike late part of last year and then you see some reversion in the late part of Q1 and that has continue coming down, in Q2 that's very consistent with our observation of our asset performance and vintage performance or early innings of indications. However, there are some recent - probably in June or May and June timeframe, further uncertainties are industry volatilities that create some upswing of some asset quality performance. So that what shows in our performance stat, we were pushing our asset performance to certain level but we probably felt certain…

The next question comes from the line of Jacky Zuo of Deutsche Bank. Your line is now open.

I think three questions from me. First one is on regulation. So, previously I think in June Beijing require we can't grow our P2P balance basically, but then in the recent 108 requirements they do not put this on strict rules. So just want to get an update, can we still grow our loan balance and the sort of loan balance control, when do we expect this can be removed? Is that until the year-end or until the formal registration probably next year? And also related to this, the rule 108 also said something related to the wealth management business. Saying that P2P platform cannot put like some internal link to do marketing for third-party wealth management product, just want to get a view that will that effect our wealth management business. And second question is related to the funding. So particularly on the institutional funding, we see some progress getting, like, funding from XinWang and also Goldman Sachs. Just want to see if we have more pipeline on the institutional funding and what percentage of institutional funding of overall funding structure we will see probably at the year-end or next year, so in terms of funding mix? And the third one is on our cooperation with [Yirendai] parent. So I think previous plan is we will terminate the agreement and basically stop the offline customer acquisition. So we will stop them now? Thank you.

So we'll go through these questions. In case we miss any points please just let us know. So in terms of the regulation, yes. So Beijing Financial Bureau has issued a cap requirement in mid or early June. So basically for all the ending balance that's financed by the regional P2P investors, has to stay at the end of June. So we're in strict compliance to that so that also put certain cap in term of how much we can grow through Q3 and Q4. However for that we believe if we were able to bring in more institutional capital that is not subject to the cap. In terms of the recent 108 regulation compliance evaluation process, as you probably know first will go through self-evaluation and then they will be industry association sponsored NIFA sponsored industry check. And then you will have the local regulators versus evaluation process by the end of the year. So we expect in the next - through the next few months and to the end of the year we will go through these evaluation process and then that data will get reported at the local and the national level. In terms of if the cap could be removed once we complete certain level of evaluation. We’re not so sure about that yet, but initial there were some discussion among the regulator to support leading performing platform to continue to grow the business in general. So we believe that still is the message from local regulator, as well as central government level regulator finding the good ones and phasing out the bad ones. And then for the good ones should be business in usual, but we don’t have a clear timeline or a confirmation for that yet, but we're hopeful. In terms of the 108…

We will take the final question from Alex Ye of UBS. Please ask your question.

I have three questions, the first one is on your duration per term. So I recall you just said you’re shortening your duration right so can I have an update on what the percentage of your 12 month or 24 and 36 months loan product and perhaps an average tenure. And secondly about the provision. So we have around 200 million of additional provision I mean expense this quarter. So should we expect these one-off provision to continue going forward given we have already shift the third-party -- the credit [insurance] fund to third-party guarantee. And also about the 136 million of provision expense in other income line, can you give us some color on why do we need additional provision line on this, because we already have the provision in the top line and also in the general admin so what is this about? And finally question is on your Baidu partnership, do we have a percentage in terms of the contribution of this partnership to our loan volume in this quarter. And apart from our on capital of 880 million do we have additional capital funding contribution and what is the target volume are we targeting? Thank you.

Sure, so I will address your question and maybe then at the same time Joanne can find the mix for the different months products and also the provision. So I think overall trend you’re correct, I think into Q2 we are seeing somewhat shortening of the overall volume adjustment mix of products tenure. But I don't think it’s that significant but I do want to make one highlight in terms of product. I think right now our average product duration is probably around 30 months. But when people are thinking about the liquidity match from the asset liability side, because our loan are repaid and principal interest are monthly basis, the principal adjusted weighted average maturity is actually only half of that 13 months, roughly around 15 months. And then if you consider some early repayment reduction, so our exercise duration is probably more close to 12 to 13 months. Well, on the investors side, our average investor period is probably close to 10 to 11 months. So the duration, there is still slightly mismatch. But as we go in through the current transition, it's actually a good timing particular we're looking at our PICC loans. The investment product is actually 12 months and then the 12 month loans under PICC effective duration is actually probably only six or seven months. So for those product, you actually have surplus in terms of the liability side. So, we believe in the near-term we should be able to manage this rather well and also with the help of the institutional money which is in the form of revolving line of credit that also help us in terms of that management. From the provision perspective, going forward given that our quality assurance program into the new scheme that is managed by third-party, we…

So, to add on some comments on the duration of our portfolio, we basically have about 30% of the new origination volume goes to 12 month loans. And the rest, the majority of the rest actually goes to 36 months, so about 5% to 10% goes to 24 months. So now we see about 28 to 29 month of average tenure on our portfolio. And on the balance note, the portfolio balance we see about 30 months of the average tenure. So it's pretty stable but it's trending towards a shorter duration. And about the provision, yes, we do have, sort of, two provisions you can see it from our P&L. One is related to - one is provision expense line item, that's related to the credit risk of our fees collected from the borrower, and the provision expense or the one time contingent liability that we accrue in Q2 in G&A expense is related to the credit, it's more of the credit risk related to the loan balance, the loan principal and the interest payment from the borrower. So it's kind of to the different component. So one is to the platform C, and the other is to the loan principal and the interest. So in the future I think you won't see any contingent liability increase in our balance sheet or P&L because we transfer, we basically transfer or spin that off to off balance sheet to a third-party guarantee company. But in terms of the provision expenses related to our own fee that you can see quarter-over-quarter.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Okay. Thank you.