Good day, and welcome to the Yiren Digital Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Keyao He, Investor Relations Officer. Please go ahead.

Thank you, operator. Good morning, good evening, everyone. Today's call features a presentation by our Founder, Chairman and CEO of CreditEase, Mr. Ning Tang; and our CFO, Ms. Na Mei; our new CFO, Mr. Yuning Feng, will also attend the Q&A session after the prepared remarks. Before beginning, we'd like to remind you the discussions during this call contain forward-looking statements made under the safe harbor provision of U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties, and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding future risks, uncertainties, or factors is included in our filings with the U.S. Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statements as required under the relevant laws. During the call, we will be referring to certain 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 U.S. GAAP. For information about these non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it on to Ning for opening remarks.

Thank you all for joining our earnings conference call today. Despite the evolving market environment, we are pleased to report another solid quarter with strong unit economics, reflecting the resilience of our business structure and operational strategies as well as our commitment to quality growth over mere expansion. Additionally, our strategic investments in AI and the seamless integration of technological innovation into our operations have fostered due growth in both technological advancements and operational efficiency. Our strategic direction positions us well to evolve into a leading AI-driven platform, paving the way for groundbreaking solutions and setting new industry standards. Now I would like to go through our business highlights for this quarter. First, our financial services business. The second quarter of 2024 saw a steady growth with total loan volume reaching RMB12.9 billion, marking a 59% increase year-over-year and maintaining a resilient consecutive quarterly growth despite an industry slowdown. The momentum is largely driven by the concrete growth of our new customers with higher credit quality as we continue to optimize our asset quality of loan portfolios. Since the second half of 2023, when the entire industry experienced substantial credit risk fluctuations, we started to proactively upgrade our customer mix and diversify our online acquisition channels. The strategy has proven effective, leading to secure growth and improved asset quality. Meanwhile, we have refined our proprietary RTA credit model for borrower acquisition, which has notably enhanced our overall credit approval efficiency. In this quarter, the number of borrowers served increased by 47% year-over-year to RMB1.5 million. Moreover, our loan facilitation platform continued to gain popularity with monthly active users rising by 88% year-over-year to RMB4.5 million in the second quarter of this year, showcasing strong customer engagement and loyalty. As we maintain our focus on attracting high-quality borrowers and note that…

Thank you, Ning, for all the kind words and support. Hello, everyone. On this call, I will only focus on our key financial highlights. And Yuning will join us for the Q&A section after the prepared remarks. First of all, we are glad to deliver a solid quarter with the wholesale profitability. In the second quarter of this year, our total revenue reached RMB1.5 billion, 30% increase year-over-year. In the Financial Service segment, total loan facility continued to grow slightly, reached RMB12.9 billion, up 59% year-over-year. This growing demand driven by the number of our new power [ph] and the strong demand of our small working loan products. Revenue from financial service business increased 14% year-over-year to RMB851 million. The momentum remained strong throughout the year. In the insurance sector, our gross written premium was RMB1.1 billion, a decrease of 20% year-over-year but an increase of 15% compared with the prior quarter. The year-on-year decline was driven by a substantial drop in our life insurance sales following local revenue change. During the same period last year, sales of life insurance products with cap 3.5% interest rate burdened before being withdrawn from the China market due to the new regulation. Therefore, the premium in the second quarter of last year was [indiscernible] high, making sharp contraction to the decline of the second quarter this year. Meanwhile, the causative growth in our total premium was mainly driven by the expansion of our property insurance business. Consequently, the property insurance in our overall primary mix increase, translating into a lower average revenue take rate due to the lower commission fee rate complied with life insurance products. In the second quarter of this year, revenue for our insurance segment reached RMB91.5 billion, down 77% year-over-year. Going forward, we expect continued growth in our property…

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Ethan Yu [ph] with First Trust Group Inc. please go ahead.

Hi, good evening. Thanks for taking my questions. Congrats on a really solid quarter. My first question is about your AI development. As disclosed in your ESG report, the company has developed a range of AI systems. Regarding your AI strategy, have there been any notable advancements in AI applications or research? Can you share more details about any specific investments in AI sector? And also, have there any been significant risk in our AI product commercialization?

Excuse me, Ethan, I'm sorry, you're not coming through clearly. Is it possible to move the microphone closer to you and repeat, please?

I got the majority of the question and it's about the AI development, investment, commercialization, right? Yes?

Okay. He accidentally disconnected. Just a moment, Walt, he must have pressed something accidentally. So, would you like to go to the next question and have him come back... would you like me to have the next questioner ask... and then when... The next question is from Bruce Oren with Black Lab Fund. Please go ahead.

Yes. Hello. I'd like to express appreciation to the Board for the new dividend. I mean that's a good move. I'd also like to congratulate and thank Ms. Na Mei for helping to build an extraordinary company under circumstances that were often difficult. Thank you. I have two questions. The first is, could you add some insight into the large second quarter increase in net cash used in investing activities and net cash used in financing activities? And my second question is, where is most of the international business growth? Thank you.

Na, please cover them first.

Yes. As per my script for cash flow for our operation business, as we mentioned to the purpose, our financial service segment, the management is from a financial leasing opportunity to pick [Indiscernible].

I cannot hear you very clear now.

Now it's better? I'm close to the phone now.

It's better now.

Yes. please repeat... Please repeat...

...Items and also our international business market.

Yes, I'm explaining our investment cash flow, the reason why we increased so much in the first quarter. And as I mentioned, as you remember that last year, we purchased a new financial guarantee company, Chongqing Jintong, to our financial service segment purpose. For this year, the management is still going on to [indiscernible] financial license to purchase for our financial service business like the AMC Assets Company and micro-small lending companies and other financial guarantee companies for this purpose. So, for this financial license companies before the [indiscernible] come to the formal operations and repurchase process based on the communication status, we should replace some investment amount to our partners to lock the acquisition target. So, you can see our investment cash flow remains catch out that most of our investment payment to our potential financial lease target. I hope my answer has answered your question.

Yes. Do you see the cash used plateauing or continuing to grow greatly?

Yes, I think you can see for the cash from the operating well keeps healthy and stable cash flow. And also, we have used the cash to other investment opportunity, no matter the internal financial license or the international overseas business development also in our AI strategy. We also have many cash implementation. But in our forecast, we still have the confidence in our cash and cash equivalent balance with strong status in the next quarter, yes.

Our international business covers the Philippines and Mexico. And we're also looking to expand to certain other markets in Southeast Asia and other parts of the world.

[Operator Instructions].

Is the first gentleman back?

Yes, we have him now.

We cover, yes, the AI investment implementation part, yes?

Yes, Ethan again. Can you tell me now?

Yes, I can hear you very clearly. And actually, as I reported at the beginning, we use AI extensively in our operations. And we also try and yes, leverage the technology capabilities developed internally for potential like external like opportunities like we have fintech partners, financial institutions that are interested in our solutions. And yes, I hope we'll see some results later this year or, yes, first half next year. At the same time, we try and build a strategic investment and partnership infrastructure like ecosystem. And so, we've made a couple of small, but in my view, hopefully, yes, very promising investments in the AI space, but their contributions are very tiny. And going back to our like AI, like the use cases internally, for example, like, we use AI in customer like acquisition, customer service, like we use robots like, and the large language models, yes, for like incoming out bounding calls, like say, when we detect the customer like emotions change, it's time to switch to like a human, like, operator, we will do that. And also, the machine can interact with a customer up to the right point to switch to the human, so on. And of course, we use voice recognition technology. And also, I gave the example, our large language models used in the Philippines, right, can do a great, visual recognition algorithm because in the Philippines, like IDs personal identification, like a paper work is really paper. So, it's not very digital and it takes quite some skills to detect the risk. So, AI plays a key role there and so on. So yes, basically, we use AI extensively in our own operations and some like technologies are really welcomed by outside partners, prospects like buyers, yes, so customers. So, we will try to monetize these technologies as well.

Okay. My second question is there is a continued rise in your R&D costs. Could you share us more color about how these costs have been used?

Yes. So, for our AI, large language model development. Yes, we take open source a model combined with our own data and business algorithm to develop our proprietary models, and we purchase hardware and yes, develop software and so on. And so, in the second quarter, I believe, it was about RMB56 million, yes. So, I think this is money well spent. And yes, so I think our investment in AI has been prudent. But, strategic for the future.

Can I ask one more question about your overseas business?

Sure.

Yes. Can I know what is the total loan volume facilitated overseas in second quarter 2024? I'm impressed with the growth rate achieved in the Philippines. And also, you have mentioned that you have made another progress in Mexico. And what is the driving rate achieved in Philippines?

Say it again, sorry the last part...

Yes, what is driving this growth? And what's your outlook for the revenue generated from overseas business and profit in, let's say, second half 2024 or the coming 2025?

I see. Well, yes, the growth rate has been phenomenal largely because the base is too small. We really hope to grow the base. And so, the second quarter, loan volume was RMB63 million and we expect to do an over RMB100 million in this quarter. We hope to maintain, a relatively high growth rate, for the foreseeable future just because the base is still small. And also, you asked about the growth driver. I mean, the Philippines and some other countries in Southeast Asia and also in Latin America, they are large countries, with population of over like 100 million. And also, the target customer base is very young, which we like very much. And so, they have really strong demand for convenient credit, but the market certainly lacks such opportunities, means. So, we are there to yes leverage the capabilities we've developed in Mainland China. And so, I think this is a very, very big opportunity, frankly speaking, for us to do credit tax outside of Mainland China in these large population, young markets where digital finance is still in very early days and booming.

Yes. Okay. Understood. May I know the current customer acquisition cost for these countries, especially in Philippines?

Na, you have this number?

Yes. So, for our Philippines business due to the acquisition cost is based on our new customer acquisition strategy. And based on the current data in this quarter, about 1% is around $5 or $10 of 1-unit person. But I think in the second half year of this year, as Ning mentioned about, we hope and look for our development growth, our Philippines business and other wholesale business. So, in the second half of the year, for our business development, we will [indiscernible] to our new customer acquisition. So, we plan acquisition rate [indiscernible] will be a bit increased in third and fourth quarter, but in this quarter, it's about $5 or $10 1 person. Yes.

The next question comes from Dylan Paul [indiscernible]. Please go ahead.

Yes. Can you hear me? I'm going to switch off speaker like you recommended. Thank you, so much. This is Dylan Paul [ph] here, private investor. Myself and my friend, Dale Tiongson very sorry, he can't be here, have been following and invested in the company for a couple of quarters now along, and we want to thank you all for the strong result. And we also mentioned that we'd like to hear from any people listening to the call who are interested in sharing bidirectional insights. So please reach out to us via e-mail or social media, which is easily found online. We have two questions. The first is related to the guarantee business. And I will say that these questions actually that Dale is the one who's most talented in understanding and insights on the business. So, I won't be able to ask any further follow-up, but I wanted to get them out there for his sake. The first is related to the guarantee business. It seems like this is becoming a growing part of the business, and we are interested in some additional color. Maybe you could speak towards how the guarantee contracts work in terms of sharing of credit risk and what that means for a return relative to the default rate on the underlying loans? And we also understand the accounting to be atypical for provisions. Could you maybe explain just how the accounting works or provide additional color? And would it be helpful to show progression of loss provisions to write-offs in the quarter similar to how you do for contract receivables in the 10-K. And then the final component, which again, maybe I should be separating...well, actually, let me stop right there. And then it sounds like, sorry, this is my first time doing a call before. It sounds like I can come back and ask that second question. I won't have any follow-up on the first because your answers, I won't be able to adequately process in the way Dale does when he's listening to them. So, let me just stop right there with that first question there for questions.

We'll try to cover that. Maybe I can suggest that, yes, we can have a follow-on call to go into some of the details with your friend.

All right. That's fine. And then let me see then whether you have the same recommendation for the second question then, which is it's related to the parent controlling shareholder structure, which I guess we can or Dale in particular, but we have continued to be confusing for us. And I know we have asked about it before. But just wondering, is there any further color you can provide regarding CreditEase and how the relationship works with Yiren, which, again, I've been involved in that question before. And so, I know you've addressed it and then you mentioned this before that he knows there's a large transaction in 2019, and this is maybe the new part that can be addressed and nothing has happened since. But are you expecting any related party transactions coming up here, if you're able to speak to that? Thank you.

Not as substantial as like the one you mentioned several years ago, not even close. Yes.

Okay. All right. Well, that's all of our questions or Dale's more specifically. And again, most importantly, thank you for that tour that you guys gave me while I was in China and answering questions at that time and all your efforts that you've done with both myself and Dale to help understand the company, and we are currently very bullish and excited about everything you guys have accomplished so far.

You are more than welcome to come back, see us. And so yes, we'll book a follow-up call to cover all the detail...

And again, Dale is a technical guy, that stuff confuses me too. I can't follow him...

This concludes…. Go ahead, please.

Okay. Thank you for listening to our company, and I hope you will come in again later.

And then this concludes our question-and-answer session and concludes the Yiren digital conference call. If you have any further questions, please contact the Investor Relations team at Yiren Digital. Thank you for attending today's presentation. You may now disconnect.